On the Nature and Predictability of Corporate Bond Returns

47 Pages Posted: 23 Aug 2011 Last revised: 15 Nov 2013

See all articles by Daniel Haesen

Daniel Haesen

Robeco Investment Research

Patrick Houweling

Robeco Investment Research

Date Written: May 16, 2012

Abstract

Corporate bond returns consist of two distinct components: an interest rate component, which is default-free and anti-cyclical, and a credit spread component, which is default-risky and pro-cyclical. These components are mutually negatively correlated and their relative importance varies with credit quality. We show that it is of critical importance to take this into account when studying the predictability of corporate bond returns. In this paper we focus on the credit spread component of corporate bond returns, enabling us to find new predictors that were previously unknown to the literature. Moreover, by re-examining previously documented predictors, we are able to dismiss several of them as irrelevant for credit spread returns and to explain inconsistent findings between investment grade and high yield corporate bonds. In total, we find four factors with significant in-sample and out-of-sample predictability of both investment grade and high yield excess returns over Treasury. Two variables come from the existing literature: past equity return and past corporate bond return. Evidence for the other two variables is new: change in implied equity volatility and the Halloween indicator.

Keywords: corporate bonds, credit spreads, excess returns, predictability, market timing

JEL Classification: C22, C53, G11, G12

Suggested Citation

Haesen, Daniel and Houweling, Patrick, On the Nature and Predictability of Corporate Bond Returns (May 16, 2012). Available at SSRN: https://ssrn.com/abstract=1914680 or http://dx.doi.org/10.2139/ssrn.1914680

Daniel Haesen

Robeco Investment Research ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands
+31 10 224 7167 (Phone)

HOME PAGE: http://www.robeco.com/quant

Patrick Houweling (Contact Author)

Robeco Investment Research ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands
+31-10-2243538 (Phone)

HOME PAGE: http://www.robeco.com/quant

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