High-yield bond and energy markets

Abstract

High-yield bonds hold a particularly unique space in the debt market. From many aspects, literature suggests these assets to behave more like stocks than bonds. Given the significant similarities between the high-yield bond and stock markets, it is expected for these markets to be similarly affected by certain outside factors. Some shocks, including the ones from energy markets, are known to impact the entire stock market and not just related company shares. Since high-yield bond portfolios include some amount of energy company debt, the recent volatility in energy prices has been particularly concerning to market participants. However, the question of whether price and volatility shocks only impact energy company bonds or the entire high-yield bond market - as they do with the stock market - still remains unanswered. This study attempts to address that question by exploring the dynamic relationships between the high-yield bond and energy markets. Price transmission tests, which account for gradual structural shifts, suggest oil and ethanol markets significantly impacting the high-yield bond market. Furthermore, volatility tests find uni-directional volatility transmitting from energy markets to the high-yield bond market. © 2017 Elsevier B.V.