Momentum crash, credit risk and optionality effects in bear markets and crisis periods: evidence from the US stock market

ABSTRACT

This study explores whether the credit risk anomaly exhibits option-like behaviour similar to the momentum anomaly. It finds that the inverted credit risk spread indeed displays option-like behaviour in bear market states. Unlike a momentum portfolio, which is effectively a short call option on the market, an inverted credit risk portfolio appears to be a long call option on the market.

KEYWORDS:

• Credit risk
• optionality
• momentum
• bear market states
• financial crisis

JEL CLASSIFICATION:

• G12
• G14

Acknowledgement

I am thankful to Jukka Sihvonen, Antti Klemola, Shaker Ahmed, and Anna-Maija Lantto for useful advice.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ See Grobys and Haga (2016) for more details.