The relationship between equity and bond returns: An empirical investigation

Amer Demirovic, Cherif Guermat, Jon Tucker

Research output: Contribution to journalArticlepeer-review

5 Citations (Scopus)
1127 Downloads (Pure)


The correlation between equity and corporate debt is ambiguous. News affecting the value of a firm's assets induces a positive correlation, whereas an increase in the volatility of a firm's assets induces a negative correlation. We examine the conditional correlation between these two securities. While the average correlation is positive, the conditional correlation increases with credit risk, and decreases with equity volatility. Our results are consistent with the thesis that the equity bond relation is dependent on the potential wealth transfer between stock and debt holders. Nevertheless, this relation seems to break down during periods of extreme market uncertainty.

Original languageEnglish
Pages (from-to)47-64
Number of pages18
JournalJournal of Financial Markets
Early online date19 Aug 2017
Publication statusPublished - 1 Sept 2017
Externally publishedYes

Bibliographical note

NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Financial Markets. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Financial Markets, Vol 35 (2017)] DOI: 10.1016/j.finmar.2017.08.001

© 2017, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International


  • Distance to default
  • Equity volatility
  • Equity-bond correlation

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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