The Global Cross-Section of Corporate Bonds: Market, Maturity and Liquidity

Abstract

We investigate a large set of pricing factors for corporate bonds in the 6 largest international markets. Econometrically, we show that pricing tests of cross-sections of bond portfolios are severely compromised in small samples. Employing Barillas and Shanken (2017) tests and global portfolios, standard corporate bond factor models are rejected in favor of a model featuring the global corporate bond market, a global maturity spread factor and a global liquidity spread factor. This model also prices a wide set of cross sections, including momentum, value, idiosyncratic risk, downside risk and ratings portfolios. The model also fits currency-specific cross-sections well, except for Japanese Yen bonds. Including a local market factor improves the fit substantially for Japanese Yen bonds. All returns are hedged in US dollars as hedged corporate bond portfolios strongly outperform unhedged portfolios.

Keywords: Asset Pricing, Corporate Bonds, Factors, Financial Integration, Currency Hedging

JEL Classification: G12, G15