Exploiting Uncertainty with Market Timing in Corporate Bond Markets
Journal of Asset Management 19 (2), 79-92, 2018
1 Pages Posted: 24 Jul 2017 Last revised: 22 Aug 2018
Date Written: July 1, 2017
Abstract
The purpose of this article is to show the usefulness of technical analysis in credit markets. We document that an application of a simple moving average timing strategy to U.S. high yield and U.S. investment grade corporate bond portfolios sorted by option-adjusted spread generates investment timing portfolios that substantially outperform the corresponding benchmark. For portfolios with high uncertainty, as measured by the option-adjusted spread, the abnormal returns generate economically and statistically significant returns relative to the capital asset pricing model (CAPM), the Carhart 4-factor model and additionally the bond factor model from Asness et al. (2013). Our results remain robust to different moving average formation periods, transaction costs, long-short portfolio construction techniques and alternative definitions of information uncertainty.
Keywords: Market efficiency, market timing, predictability, behavioral finance, technical analysis
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation