Factor Investing and the Integration of Corporate Bond and Equity Markets
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We find cross-market information expands the mean-variance efficiency in corporate bond and equity markets. Using 41 bond and 288 equity characteristics from the U.S. (2004-2022), we construct Within-Market and Cross-Market managed-portfolios optimized via a maximum Sharpe ratio framework. The Cross-Market strategy significantly outperforms Within-Market alternatives, generating robust alphas. These strategies are SDF projections onto payoff spaces; the efficiency expansion rejects complete market integration in the spanning sense, conditional on our managed-portfolio design. Crosssectional and time-series analyses reveal that the rejection is concentrated in illiquid and hard-to-arbitrage segments and attenuates when volatility is low and liquidity is high.