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 as predictors, and to make full use of short-, intermediate- and
long-term trends simultaneously to predict future returns. We uncover the first strong evidence
that there is statistically significant and economically important predictability in the cross section
of corporate bond returns. The predictability is robust to various controls, and presents an
anomaly that challenges existing rational pricing models in a similar manner as equity anomalies.

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

JEL Classification: G12; G14