Book-to-Market, Mispricing, and the Cross-Section of Corporate Bond Returns

Söhnke Bartram, Mark Grinblatt and Yoshio Nozawa

No 17592, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Corporate bonds’ book-to-market ratios predict returns computed from transaction prices. Senior bonds (even investment-grade) with the 20% highest ratios outperform the 20% lowest by 3%–4% annually after non-parametrically controlling for numerous liquidity, default, microstructure, and priced-risk attributes: yield-to-maturity, bid-ask-spread, duration/maturity, credit spread/rating, past returns, coupon, size, age, industry, and structural model equity hedges. Spreads for all-bond samples are larger. An efficient bond market would not exhibit the observed decay in the ratio’s predictive efficacy with implementation delays, small yield-to-maturity spreads, or similar-sized spreads across bonds with differing risk. A methodological innovation avoids liquidity filters and censorship that bias returns.

Keywords: Corporate bonds; Market efficiency; Credit risk; Transaction costs; Point-in-time (pit); Book-to-market (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2022-10
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Working Paper: Book-to-Market, Mispricing, and the Cross-Section of Corporate Bond Returns (2020)
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