Abstract
We show theoretically and empirically that the durations of corporate securities are monotonically related to their capital structure priority, with equity often having a negative duration. The magnitude of this effect increases with firm leverage. We use these insights to challenge existing results on stock-bond comovements and factor pricing. For example, though overlooked, higher leverage and lower priority reduce the correlation between corporate security and government bond returns, and these variables explain time-series and cross-sectional variation in correlations; traditional market model regressions significantly understate corporate bond betas; and regressions on standard term and default factors dramatically overstate interest rate and default risk.
Original language | English (US) |
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Pages (from-to) | 706-753 |
Number of pages | 48 |
Journal | Review of Asset Pricing Studies |
Volume | 12 |
Issue number | 3 |
DOIs | |
State | Published - Sep 1 2022 |
Externally published | Yes |
ASJC Scopus subject areas
- Finance
- Economics and Econometrics