Working Papers,
Lund University, Department of Economics

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.

Keywords: stock market; credit default swap; implied volatility; CreditGrades; return expectations

JEL-codes: G01; G10

29 pages, October 12, 2016

Full text files

WP16_26  Full text

Download statistics

• Lund University, Department of Economics
• Home page for this series

Questions (including download problems) about the papers in this series should be directed to Iker Arregui Alegria ()
Report other problems with accessing this service to Sune Karlsson ().

RePEc:hhs:lunewp:2016_026This page generated on 2024-09-17 17:40:00.