Investor Sentiment and the Cross-Section of Corporate Bond Returns
54 Pages Posted: 18 Aug 2018 Last revised: 23 Sep 2019
Date Written: September 21, 2019
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: Suggested Citation