Portfolio Diversification and International Corporate Bonds

Edith Liu

Journal of Financial and Quantitative Analysis, 2016, vol. 51, issue 3, 959-983

Abstract: This article examines the benefits of corporate bond diversification for U.S. investors. Analysis of a newly compiled bond-level data set for 2000–2010 finds that diversification with corporate bonds can significantly reduce volatility and increase risk-adjusted returns for U.S. investors. Unlike diversification with equities, corporate bonds offer significant out-of-sample risk reduction, particularly during the recent financial crisis. Risk-reduction gains are large even when the benchmark includes international equities or when longer samples of equities and sovereign bonds are used to inform corporate bond returns. Finally, significant risk-reduction gains remain after accounting for bond characteristics, liquidity, and informational costs.

Date: 2016
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