Replication of BBW Factors with WRDS Data

27 Pages Posted: 22 Jun 2023 Last revised: 6 Nov 2023

See all articles by Jennie Bai

Jennie Bai

Georgetown University - McDonough School of Business; National Bureau of Economic Research (NBER)

Turan G. Bali

Georgetown University - McDonough School of Business

Quan Wen

McDonough School of Business, Georgetown University

Date Written: June 12, 2023

Abstract

The WRDS Corporate Bond Database, introduced in April 2017, offers a clean and publicly accessible dataset for corporate bond research. In this article, we construct and replicate the Bai, Bali, and Wen (2019, BBW) factors using the WRDS bond returns with the SAS codes in the appendix. Using the WRDS data, we find significant average returns on the downside risk (DRF), credit risk (CRF), liquidity risk (LRF), and short-term reversal (REV) factors. When we horse race between the CAPM and BBW factor models, we find that there is no significant alpha on the bond market factor controlling for the DRF, CRF, and LRF factors, indicating that the aggregate bond market factor of the CAPM is a mixed bag of the common risk factors in bond returns (DRF, CRF, and LRF). Similarly, the CAPM alphas on the DRF, CRF, and LRF factors are statistically insignificant controlling for the bond market factor. When we further investigate the relative performance of the CAPM vs. BBW, we find that BBW has a higher tangent portfolio Sharpe ratio than the CAPM. Overall, the results from WRDS data show that the market risk of corporate bonds can be viewed as an assemblage of downside, credit, and liquidity risks in the bond market.

Keywords: WRDS bond database, corporate bonds, BBW factors

JEL Classification: G10, G11, C13

Suggested Citation

Bai, Jennie and Bali, Turan G. and Wen, Quan, Replication of BBW Factors with WRDS Data (June 12, 2023). Georgetown McDonough School of Business Research Paper No. 4476612, Available at SSRN: https://ssrn.com/abstract=4476612 or http://dx.doi.org/10.2139/ssrn.4476612

Jennie Bai

Georgetown University - McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

HOME PAGE: http://www.jenniebai.com

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Turan G. Bali (Contact Author)

Georgetown University - McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: https://sites.google.com/a/georgetown.edu/turan-bali

Quan Wen

McDonough School of Business, Georgetown University ( email )

37th and O Street, NW
Washington D.C., DC 20057
United States

HOME PAGE: http://quan-wen.facultysite.georgetown.edu/home

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
785
Abstract Views
3,004
Rank
60,210
PlumX Metrics