The Low Beta Anomaly: A Corporate Bond Investor's Perspective

Abstract

The low beta anomaly is well documented for equity markets. However, the existence of such a factor in corporate bond markets is less explored. I find that European corporate bonds of firms with a low equity beta have higher risk-adjusted returns, on average, than European corporate bonds of firms with a high equity beta. The results are economically and statistically significant as low beta credit portfolios improve the Sharpe ratio up to 30%. Moreover, even after accounting for transaction costs and by considering long-only portfolios, the risk-adjusted return remains substantial indicating practical implementability of the strategy for corporate bond investors.

Keywords: corporate bonds, risk premium, factor investing, low beta, anomalies

JEL Classification: F3, G1, G11, G12, G14