The asymmetric predictability of high-yield bonds

•The estimation of VAR model shows that the stock market returns lead high-yield bond returns, but not vice versa.•This lead–lag relationship is more solid during bear market periods.•Out-of-sample forecast shows that high-yield bond returns are better predicted by a VAR model during bear market periods, but such is not the case during non-bear market periods.•The predictability of high-yield bonds is asymmetric.

This study examines the relationship between the high-yield bonds market and the stock market and indicates that stock returns lead high-yield bond returns. Specifically, this study further shows that this lead–lag relationship is more solid during bear market periods since a downward trend in the stock market implies a high likelihood of the exercise of the equity put in short position embedded in a high-yield bond at maturity. We also conducted out-of-sample forecast using a VAR model, an AR model and naïve estimation during bear market and non-bear market periods. Our results demonstrate that high-yield bond returns are better predicted by a VAR model that includes past stock returns than by an AR model or naive estimation during bear market periods, but such is not the case during non-bear market periods.