[This paper documents significant momentum in a comprehensive sample of 81,491 U.S. corporate bonds with both transaction and dealer-quote data from 1973 to 2011. Momentum is driven by noninvestment grade (NIG) bonds. Momentum profits have increased over time, along with the growth of this segment. From 1991 to 2011, they average 59 basis points (bps) per month across all bonds and 192 bps in NIG bonds. NIG bonds issued by private firms earn even higher profits (282 bps). Momentum profits do not appear to compensate for risk or persist as a result of trading frictions. Bond momentum is not just a manifestation of equity momentum.]

Using a large sample of U.S. mortgages observed over the 2005–2009 period, we document contagion effects in strategic mortgage defaults. Strategic defaults result from borrowers choosing to exercise their in the money default option and our findings suggest this choice is influenced by the delinquency rate in surrounding zip codes (within a 5 mile radius), after controlling for other known determinants of mortgage default. These controls include a large array of borrower and loan characteristics, local demographic and economic conditions, spatial correlations, and changes in property values. Our findings that the local area delinquency rate is an important factor for strategic defaulters (borrowers that can be influenced in their decision) but not for defaults that are the result of inability to pay (borrowers that had no choice) lend support the contagion hypothesis. Our estimates suggest that a 1% increase in the local area delinquency rate may increase the probability of a strategic default by 7.25–16.5%.

This paper documents significant momentum in a comprehensive sample of 81, 491 U.S. corporate bonds with both transaction and dealer-quote data from 1973 to 2011. Momentum is driven by noninvestment grade (NIG) bonds. Momentum profits have increased over time, along with the growth of this segment. From 1991 to 2011, they average 59 basis points (bps) per month across all bonds and 192 bps in NIG bonds. NIG bonds issued by private firms earn even higher profits (282 bps). Momentum profits do not appear to compensate for risk or persist as a result of trading frictions. Bond momentum is not just a manifestation of equity momentum. The Author 2013. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: [email protected]., Oxford University Press.

Defining contagion as correlation over and above that expected from economic fundamentals, we find strong evidence of worst return contagion across hedge fund styles for 1990 to 2008. Large adverse shocks to asset and hedge fund liquidity strongly increase the probability of contagion. Specifically, large adverse shocks to credit spreads, the TED spread, prime broker and bank stock prices, stock market liquidity, and hedge fund flows are associated with a significant increase in the probability of hedge fund contagion. While shocks to liquidity are important determinants of performance, these shocks are not captured by commonly used models of hedge fund returns.