Exploiting Uncertainty with Market Timing in Corporate Bond Markets

D. Bektic and T. Regele

Publications of Darmstadt Technical University, Institute for Business Studies (BWL) from Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL)

Abstract: The purpose of this article is to show the usefulness of technical analysis in credit markets. We document that an application of a simple moving average timing strategy to US high-yield and US investment-grade corporate bond portfolios sorted by option-adjusted spread generates investment timing portfolios that substantially outperform the corresponding benchmark. For portfolios with high uncertainty, as measured by the option-adjusted spread, the abnormal returns generate economically and statistically significant returns relative to the capital asset pricing model, the four-factor model and additionally the bond factor model from Asness et al. (J Finance 68:929–985, 2013). Our results remain robust to different moving average formation periods, transaction costs, long–short portfolio construction techniques and alternative definitions of information uncertainty.

Date: 2018-03
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Published in Journal of Asset Management 2 (2018-03) : pp. 79-92

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https://doi.org/10.1057/s41260-017-0063-6

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Persistent link: https://EconPapers.repec.org/RePEc:dar:wpaper:92506

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