Capital Structure Priority Effects in Durations, Stock-Bond Comovements, and Factor Pricing Models

Jaewon Choi, Matthew Richardson, Robert F. Whitelaw

Research output: Contribution to journalArticlepeer-review

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 languageEnglish (US)
Pages (from-to)706-753
Number of pages48
JournalReview of Asset Pricing Studies
Volume12
Issue number3
DOIs
StatePublished - Sep 1 2022
Externally publishedYes

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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