Working Paper: CEPR ID: DP17592
Authors: Shnke Bartram; Mark Grinblatt; Yoshio Nozawa
Abstract: Corporate bonds’ book-to-market ratios predict returns computed from transaction prices. Senior bonds (even investment-grade) with the 20% highest ratios outperform the 20% lowest by 3%–4% annually after non-parametrically controlling for numerous liquidity, default, microstructure, and priced-risk attributes: yield-to-maturity, bid-ask-spread, duration/maturity, credit spread/rating, past returns, coupon, size, age, industry, and structural model equity hedges. Spreads for all-bond samples are larger. An efficient bond market would not exhibit the observed decay in the ratio’s predictive efficacy with implementation delays, small yield-to-maturity spreads, or similar-sized spreads across bonds with differing risk. A methodological innovation avoids liquidity filters and censorship that bias returns.
Keywords: corporate bonds; market efficiency; credit risk; transaction costs; point-in-time
JEL Codes: G11; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high BBM ratios (G32) | corporate bond returns (G12) |
| BBM signal efficacy declines with implementation delays (L96) | predictive power of BBM ratios (G32) |
| high BBM bonds do not exhibit greater default risk or liquidity costs (H74) | BBM anomaly is indicative of mispricing (G19) |
| BBM ratios serve as significant predictors of returns (G17) | returns for bonds across various risk categories (G12) |