Salience Theory and Corporate Bond Pricing

36 Pages Posted: 30 Sep 2022 Last revised: 23 Oct 2022

See all articles by Tse-Chun Lin

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Yaoyuan Zhang

HKU Business School

Date Written: September 22, 2022

Abstract

We document a novel salience effect in the US corporate bond market. We find that bonds with lower salience theory (ST) value have higher returns in the subsequent month. The annualized differences in one-month holding excess returns between the lowest and highest ST deciles are 3.84|-.2.-| and 4.44|-.2.-| for equal-weighted and value-weighted portfolios. However, the salience effect is only exhibited in the most salient downside returns. These results indicate that corporate bond investors overweight salient negative returns when forming their expectations of future returns. Consequently, bonds with salient downside returns are undervalued and yield higher returns in the subsequent month.

Keywords: Salience theory, Limited attention, Downside returns, Corporate bond pricing, Cross-sectional return predictability

JEL Classification: G11, G12, G13

Suggested Citation

Lin, Tse-Chun and Zhang, Yaoyuan, Salience Theory and Corporate Bond Pricing (September 22, 2022). Available at SSRN: https://ssrn.com/abstract=4228611 or http://dx.doi.org/10.2139/ssrn.4228611

Tse-Chun Lin (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Yaoyuan Zhang

HKU Business School ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

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