The Cross-Section of Corporate Bond Returns

20 Pages Posted: 4 Feb 2020 Last revised: 13 Feb 2020

See all articles by Marlena I. Lee

Marlena I. Lee

Dimensional Fund Advisors

Philipp Meyer-Brauns

Dimensional Fund Advisors

Savina Rizova

Dimensional Fund Advisors

Samuel Yusun Wang

Dimensional Fund Advisors

Date Written: February 3, 2020

Abstract

Forward rates contain reliable information about cross-sectional differences in expected corporate bond returns. Many alternative bond-level and issuer-level variables, by contrast, are not reliably linked to expected bond returns or provide information about expected bond returns only through their correlation with forward rates. An exception is the issuer’s prior short-term equity return. Short-term equity returns are negatively related to subsequent yield changes for the issuer’s bonds in cross-sectional regressions, consistent with our finding that short-term equity returns are positively related to subsequent differences in bond returns even after controlling for forward rates. While the information in forward rates about differences in corporate bond returns tends to last for over a year, the information in short-term equity returns decays fast.

Keywords: corporate bonds, factor investing, fixed income, forward rates

JEL Classification: G11, G12

Suggested Citation

Lee, Marlena I. and Meyer-Brauns, Philipp and Rizova, Savina and Wang, Samuel Yusun, The Cross-Section of Corporate Bond Returns (February 3, 2020). Available at SSRN: https://ssrn.com/abstract=3531279 or http://dx.doi.org/10.2139/ssrn.3531279

Marlena I. Lee

Dimensional Fund Advisors ( email )

6300 Bee Cave Road, Building One
Austin, TX 78746
United States

Philipp Meyer-Brauns (Contact Author)

Dimensional Fund Advisors ( email )

6300 Bee Cave Road, Building One
Austin, TX 78746
United States

Savina Rizova

Dimensional Fund Advisors ( email )

6300 Bee Cave Road, Building One
Austin, TX 78746
United States

Samuel Yusun Wang

Dimensional Fund Advisors ( email )

6300 Bee Cave Road, Building One
Austin, TX 78746
United States

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