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The Journal of Fixed Income

The Journal of Fixed Income

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Article

Liquidity Risk and Momentum Spillover
from Stocks to Bonds

Hai Lin, Junbo Wang and Chunchi Wu
The Journal of Fixed Income Summer 2013, 23 (1) 5-42; DOI: https://doi.org/10.3905/jfi.2013.23.1.005
Hai Lin
is an associate professor of finance in the School of Economics and Finance at Victoria University of Wellington in Wellington, New Zealand. hai.lin@vuw.ac.nz
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Junbo Wang
is an associate professor of finance in the Department of Economics and Finance at the City University of Hong Kong in Kowloon, HKSAR. jwang2@cityu.edu.hk
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Chunchi Wu
is M&T Chair in Banking and Finance in the Department of Finance and Managerial Economics, School of Management, at State University of New York at Buffalo in Buffalo, NY. chunchiw@buffalo.edu
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Abstract

This article investigates the role of liquidity risk in the momentum spillover from stocks to bonds by using a large data sample. The evidence strongly suggests that liquidity risk is an important determinant of momentum spillover returns. This finding is robust to controls for effects of trading liquidity, credit risk, behavioral factors, and bond characteristics. On average, liquidity risk explains about 40% of momentum spillover profits for investment-grade bonds and 55% for speculative-grade bonds over the 16-year sample period. A significant portion of momentum spillover returns can be viewed as compensation for investors’ exposure to liquidity risk when engaging in trading this anomaly.

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The Journal of Fixed Income: 23 (1)
The Journal of Fixed Income
Vol. 23, Issue 1
Summer 2013
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Liquidity Risk and Momentum Spillover
from Stocks to Bonds
Hai Lin, Junbo Wang, Chunchi Wu
The Journal of Fixed Income Jun 2013, 23 (1) 5-42; DOI: 10.3905/jfi.2013.23.1.005

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Liquidity Risk and Momentum Spillover
from Stocks to Bonds
Hai Lin, Junbo Wang, Chunchi Wu
The Journal of Fixed Income Jun 2013, 23 (1) 5-42; DOI: 10.3905/jfi.2013.23.1.005
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  • Article
    • Abstract
    • DATA
    • MOMENTUM SPILLOVER FROM STOCKS TO BONDS
    • PRICING LIQUIDITY RISK WITH MOMENTUM SPILLOVER PORTFOLIOS
    • MOMENTUM SPILLOVERS IN DIFFERENT STATES
    • CONCLUSIONS
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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  • PDF

Cited By...

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More in this TOC Section

  • Editor’s Letter
  • The Bond Coupon’s Impact on Liquidity
  • Reach for Safety
Show more Article

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