I'm running some stress tests and I have data on equity shocks available. Is there a relationship which, for the same issuer, links the returns of the shares with those of the bonds issued?

  • 2
    $\begingroup$ Closest thing that comes to mind is Merton's distance-to-default model. Stock returns enter the model via the volatility term. Bond returns, however, do not (only the level of the debt). It's basically Black Scholes on the total assets of a company with strike equal to the level of debt. $\endgroup$
    – oronimbus
    Commented Jan 16, 2023 at 14:59
  • $\begingroup$ It is a complex non-linear time-varying company-dependent relationship, too difficult to model. In general, for a very healthy company (large distance to default) a drop in stock price has almost no effect on bond price. For a sick company, close to finanical default, the bonds will react negatively. $\endgroup$
    – nbbo2
    Commented Jan 16, 2023 at 19:16
  • $\begingroup$ Does this answer your question? Online sources for quantitative finance research $\endgroup$
    – Alper
    Commented Jan 16, 2023 at 21:03


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