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A contingent claims approach to the determinants of the stock-bond return relationship
journal contribution
posted on 2023-06-09, 12:10 authored by Louisa ChenLouisa Chen, Thanos VerousisThis paper decomposes two effects on a firm’s stock and bond returns - the effect of firm’s future cash flow and the effect of business risk to study the relationship between the returns of stocks and bonds issued by the same firm. Based on the contingent claims option pricing theory, we employ firm-level data and an event study methodology, and generate hypotheses regarding the stock-bond return relationship. We show that, by controlling for firm’s leverage, firm’s future cash flow has a simultaneous positive effect on firm’s stock and bond returns, whereas firm’s business risk has a decoupling effect on stock and bond returns. In addition, we provide evidence for the “flight to quality” hypothesis at a firm-specific level. Our findings complement the literature of stock and bond correlation within a theoretical framework.
History
Publication status
- Published
File Version
- Accepted version
Journal
International Journal of Banking, Accounting and FinanceISSN
1755-3830Publisher
InderscienceExternal DOI
Issue
1Volume
9Page range
1-18Department affiliated with
- Accounting and Finance Publications
Full text available
- Yes
Peer reviewed?
- Yes
Legacy Posted Date
2018-02-15First Open Access (FOA) Date
2018-07-17First Compliant Deposit (FCD) Date
2018-02-15Usage metrics
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