Investor Sentiment and the Cross-Section of Corporate Bond Returns

54 Pages Posted: 18 Aug 2018 Last revised: 23 Sep 2019

See all articles by Xu Guo

Xu Guo

State University of New York at Buffalo

Hai Lin

Victoria University of Wellington - School of Economics & Finance

Chunchi Wu

SUNY at Buffalo - School of Management

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School; China Academy of Financial Research (CAFR)

Date Written: September 21, 2019

Abstract

This paper constructs an investor sentiment measure at both individual bond and aggregate levels, uncovering the first evidence that investor sentiment has strong cross- sectional predictive power for corporate bond returns. High bond investor sentiment leads to low future returns. A portfolio that longs low sentiment bonds and shorts high sentiment ones generates an average monthly return of 0.87% for top-quality bonds and 1.48% for speculative-grade bonds. The results are robust to controlling for risk factors and bond characteristics. The cross-sectional predictability of bond returns is countercyclical, and the predictability appears to stem from its predictive power on macroeconomic conditions.

Keywords: Sentiment; Residuals; Risk Factors; Cross-Section; Bond Returns

JEL Classification: G12; G14

Suggested Citation

Guo, Xu and Lin, Hai and Wu, Chunchi and Zhou, Guofu, Investor Sentiment and the Cross-Section of Corporate Bond Returns (September 21, 2019). Available at SSRN: https://ssrn.com/abstract=3223846 or http://dx.doi.org/10.2139/ssrn.3223846

Xu Guo

State University of New York at Buffalo ( email )

Amherst, NY 14260
United States

Hai Lin (Contact Author)

Victoria University of Wellington - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6001
New Zealand

Chunchi Wu

SUNY at Buffalo - School of Management ( email )

Jacobs Management Center
Buffalo, NY 14222
United States

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School ( email )

Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)

HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/

China Academy of Financial Research (CAFR)

Shanghai Advanced Institute of Finance
Shanghai P.R.China, 200030
China

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