Behavioral Biases in the Corporate Bond Market

56 Pages Posted: 18 Dec 2017

See all articles by Jason Zhanshun Wei

Jason Zhanshun Wei

University of Toronto - Rotman School of Management

Date Written: November 15, 2017


This paper investigates the behavioral biases in the corporate bond market through the cross-section association between retail and institutional trades and corporate bond returns. The study finds that bonds heavily bought by retail investors in one month underperform in the next month relative to bonds heavily sold, and the opposite holds for institutional investors. The alpha of the high-low portfolio (formed based on decile sorting on the buy-sell trade imbalance) relative to the usual market factors is significant for retail investors, but insignificant for institutional investors. The overall results indicate that retail investors in the corporate bond market suffer from behavioral biases but institutional investors don’t. However, when the spread between the purchase and sell prices is factored into the returns, no profitable trading strategies exist, consistent with limits to arbitrage.

Keywords: corporate bond returns, retail trades, retail investors, institutional trades, institutional investors

JEL Classification: G14

Suggested Citation

Wei, Jason Zhanshun, Behavioral Biases in the Corporate Bond Market (November 15, 2017). Journal of Empirical Finance, Forthcoming, Rotman School of Management Working Paper No. 3087523, Available at SSRN:

Jason Zhanshun Wei (Contact Author)

University of Toronto - Rotman School of Management ( email )

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