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Designing a corporate bond index on solvency criteria

Lauren Stagnol ()

No 2015-39, EconomiX Working Papers from University of Paris Nanterre, EconomiX

Abstract: Doubts are rising whether bond indices, in the way they are constructed, are effective in their role of representing the markets they are designed for. Since index constituents are defined on market shares –the larger the debt obligation, the larger the share in the index– it may be that certain risks related to a high level of indebtedness are being accentuated and not necessarily representative of the market as a whole. Undue debt levels would in theory not arise in an information-efficient market, however, if prices are distorted, it makes sense to compensate for that and add elementary information on the debt issuers to the index construction process. We test how that works out on corporate bonds. We build a bond index that is based on firm accounting data rather than debt market value, and give evidence that it may serve as a market proxy.

Keywords: fundamental indexing; alternative corporate bond index; solvency criteria; market efficiency. (search for similar items in EconPapers)
JEL-codes: G10 G11 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc
Date: 2015
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