Bond Volatility, Stock Market, and Sentiment. Are They Related? Evidence from Israel during a COVID-19 Business Cycle

Recent financial literature shows a spillover effect from the stock market to the bond market, and strong investor sentiment regarding the stock market. In this paper, we studied cross-market sentiment and returns from stocks to bonds. We analyzed the effect that stock returns, volatility, and sentiment have on corporate bond volatility using the EGARCH(1,1) model. We analyzed data from the Tel-Aviv Stock Exchange (TASE), in which retail trading activity was highly evident during the COVID-19 pandemic. The results of this study suggested significant impacts of stock returns, volatility, and sentiment on corporate bond volatility, although the degree of influence of these three factors changed throughout the studied period.