Corporate Bond Portfolios and Asset-Specific Information
65 Pages Posted: 19 Dec 2016 Last revised: 25 Jun 2019
Date Written: June 24, 2019
We estimate corporate bond portfolios using numerous asset-specific characteristics. Our portfolio weights accommodate a large cross-section and allow for a flexible management of turnover and liquidity. A portfolio tilted toward higher maturity, credit risk, coupon, momentum, and size outperforms passive benchmarks after transaction costs. The gains are economically large and hold out of sample. Three reasons explain the performance. First, conditioning jointly on the characteristics optimally trades them off against each other. Second, the estimated weights use conditional information more efficiently than active funds. Finally, the portfolio returns forecast macroeconomic activity, indicating that our weights capture changes in investment opportunities.
Keywords: Corporate Bonds; Empirical Portfolio Choice; Characteristics
JEL Classification: G11, G12, C58, C13
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