The Cross-Section of Corporate Bond Returns

Abstract

We examine the cross-section of U.S. corporate bonds and account for the infrequent trading of corporate bonds, sample selection bias, duration-matching, and high transaction costs. In a net-of-costs setting, four factors turn out to offer unique, robust, and sizable return premia. These factors are a short maturity factor, a bond value factor, an equity momentum factor, and an accruals factor. A five-factor model that combines the market factor with these four factors most robustly prices the cross-section of corporate bonds after accounting for transaction costs.

Keywords: corporate bonds, transaction costs, factor premia, return anomalies, market, maturity, value, low-risk, equity momentum, accruals

JEL Classification: G11, G12