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Stock return expectations in the credit market

Byström, Hans LU (2018) In International Review of Financial Analysis 56. p.85-92
Abstract

In this paper we compute long-term stock return expectations (across the business cycle) for individual firms using information backed out from the credit derivatives market. Our methodology builds on previous theoretical results in the literature on stock return expectations and, empirically, we demonstrate a close relationship between credit-implied stock return expectations and future realized stock returns. We also find stock portfolios selected based on credit-implied stock return forecasts to beat equally- and value-weighted portfolios of the same stocks out-of-sample. Contrary to many other studies, our expectations/predictions are made at the individual stock level rather than at the portfolio level, and no parameter estimations... (More)

In this paper we compute long-term stock return expectations (across the business cycle) for individual firms using information backed out from the credit derivatives market. Our methodology builds on previous theoretical results in the literature on stock return expectations and, empirically, we demonstrate a close relationship between credit-implied stock return expectations and future realized stock returns. We also find stock portfolios selected based on credit-implied stock return forecasts to beat equally- and value-weighted portfolios of the same stocks out-of-sample. Contrary to many other studies, our expectations/predictions are made at the individual stock level rather than at the portfolio level, and no parameter estimations using historical stock price- or credit spread observations are needed.

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Please use this url to cite or link to this publication:
author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
Credit default swap, CreditGrades, Implied volatility, Return expectations, Stock market
in
International Review of Financial Analysis
volume
56
pages
8 pages
publisher
North-Holland
external identifiers
  • scopus:85040341604
ISSN
1057-5219
DOI
language
English
LU publication?
yes
id
8136bb46-e8f0-43dd-85ac-bd3437add6cc
date added to LUP
2018-01-22 08:38:07
date last changed
2018-05-29 09:23:00
@article{8136bb46-e8f0-43dd-85ac-bd3437add6cc,
  abstract     = {<p>In this paper we compute long-term stock return expectations (across the business cycle) for individual firms using information backed out from the credit derivatives market. Our methodology builds on previous theoretical results in the literature on stock return expectations and, empirically, we demonstrate a close relationship between credit-implied stock return expectations and future realized stock returns. We also find stock portfolios selected based on credit-implied stock return forecasts to beat equally- and value-weighted portfolios of the same stocks out-of-sample. Contrary to many other studies, our expectations/predictions are made at the individual stock level rather than at the portfolio level, and no parameter estimations using historical stock price- or credit spread observations are needed.</p>},
  author       = {Byström, Hans},
  issn         = {1057-5219},
  keyword      = {Credit default swap,CreditGrades,Implied volatility,Return expectations,Stock market},
  language     = {eng},
  month        = {03},
  pages        = {85--92},
  publisher    = {North-Holland},
  series       = {International Review of Financial Analysis},
  title        = {Stock return expectations in the credit market},
  url          = {http://dx.doi.org/},
  volume       = {56},
  year         = {2018},
}