Bonds, Stocks, and Sources of Mispricing
This paper shows that investor sentiment and financial distress jointly drive bond and equity overpricing underlying market anomalies. In particular, the intersection of high sentiment and rating downgrades of distressed firms characterizes episodes of inflated bond and stock prices to the extent that assets are correctly priced beyond such episodes. Overpricing among bonds and stocks emerges when sentiment-driven investors consistently underestimate the implications of financial distress for high credit risk firms.
Area: Asset Pricing and Derivatives
Keywords: Asset pricing anomalies, mispricing, bonds, stocks
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