Cross-Sectional Predictability of Corporate Bond Returns

Abstract

While there are hundreds of cross-sectional predictors in the equity market, whether corporate bonds are predictable in the cross-section is an open question. This paper proposes to use trend signals in returns, which exploit short-, intermediate- and long-term trends simultaneously, to predict future bond returns. We provide new evidence that there is statistically significant and economically important predictability in the cross-section of corporate bond returns. This predictability is robust to various controls and stronger for lower-rated bonds. The pronounced bond market anomaly uncovered in this study joins a host of equity anomalies that challenges existing rational pricing models.

Keywords: trend signals; moving averages; cross-sectional predictability; corporate bond returns.

JEL Classification: G12; G14