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Stock Return Expectations in the Credit Market

Byström, Hans LU (2016) In Working Papers 2016(26).
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. (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Working Paper
publication status
published
subject
keywords
stock market, credit default swap, implied volatility, CreditGrades, return expectations, G01, G10
in
Working Papers
volume
2016
issue
26
pages
29 pages
publisher
Department of Economics, Lund University
language
English
LU publication?
yes
id
830fff1f-4398-4536-af6f-3cc32a488287
alternative location
http://swopec.hhs.se/lunewp/abs/lunewp2016_026.htm
date added to LUP
2016-12-27 13:45:59
date last changed
2016-12-27 13:45:59
@misc{830fff1f-4398-4536-af6f-3cc32a488287,
  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 using historical stock price- or credit spread observations are needed.},
  author       = {Byström, Hans},
  keyword      = {stock market,credit default swap,implied volatility,CreditGrades,return expectations,G01,G10},
  language     = {eng},
  month        = {10},
  note         = {Working Paper},
  number       = {26},
  pages        = {29},
  publisher    = {Department of Economics, Lund University },
  series       = {Working Papers},
  title        = {Stock Return Expectations in the Credit Market},
  volume       = {2016},
  year         = {2016},
}