Corporate Bond Moments and Predictability of Equity Returns

We document that the first and third cross-sectional moments of corporate bond returns significantly and positively predict future stock market returns both in- and out-of-sample. The predictability emerges from informed bond trading and gradual diffusion of information. Particularly, the moments contain information about future aggregate firm fundamentals and real economic activity. The lead-lag effect is more pronounced when the lack of integration between the two markets is more severe. Moreover, the predictive power extends to various size- and value-sorted portfolios and industries