Corporate Bond Factors: Replication Failures and a New Framework
41 Pages Posted: 26 Oct 2023 Last revised: 2 Dec 2023
Date Written: September 28, 2023
We demonstrate that the literature on corporate bond factors suffers from replication failures, inconsistent methodological choices, and the lack of a common error-free dataset. Going beyond identifying this replication crisis, we create a clean database of corporate bond returns where outliers are analyzed individually and propose a robust factor construction. Using this framework, we show that most, but not all, factors fail to replicate. Further, while traditional factors are constructed from individual bonds, we create representative firm-level bonds, showing which bond signals work at the firm-level. Lastly, we show that a number of equity signals work for corporate bonds. In summary, most factors fail, but so does the CAPM for corporate bonds.
Keywords: asset pricing, factors, data mining, replication, multiple testing, external validity
JEL Classification: G11, G12, G14, G32, G4, C5
Suggested Citation: Suggested Citation