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.
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 (Citation2016) for more details.