Empirical Duration of Corporate Bonds and Credit Market Segmentation

Ambastha, Madhur; Dor, Arik Ben; Dynkin, Lev; Hyman, Jay; Konstantinovsky, Vadim

doi:10.3905/jfi.2010.20.1.005

Cited by 16 publications

(3 citation statements)

References 3 publications

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“…To do so, we use the overlapping portfolio approach of Jegadeesh and Titman (1993). We split the corporate bond universe into investment grade and high yield as they are effectively seen as two different asset classes by practitioners and academics (e.g., Ambastha et al, 2010).…”

Section: Methodsmentioning

confidence: 99%

Does earnings growth drive the quality premium?

Kyosev

Hanauer

Huij

et al. 2020

Journal of Banking & Finance

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Section: Methodsmentioning

confidence: 99%

Does earnings growth drive the quality premium?

Kyosev

Hanauer

Huij

et al. 2020

Journal of Banking & Finance

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“…Evidence on the division of the corporate bond market into investment-grade and high-yield segments is provided by Ambastha, Ben Dor, Dynkin, Hyman, and Konstantinovsky (2010) and Chen, Lookman, Schürhoff, and Seppi (2014). Chen et al (2014) mentioned that a large stream of extant theoretical literature shows that labels (in this case, ratings of corporate bonds) can lead to market segmentation and asset class effects by influencing investors' willingness to hold the security and can thus affect security prices.…”

Section: Methodsmentioning

confidence: 99%

Factor Investing in the Corporate Bond Market

Houweling¹,

ZundertJeroen²

2017

Financial Analysts Journal

121

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This article examines the performance of size, low-risk, value, and momentum factor portfolios in the corporate bond market. A factor portfolio is constructed by sorting bonds on a specific characteristic: Size contains bonds of small companies, based on the market value of their outstanding bonds; low risk contains short-maturity bonds with a high credit rating; value selects bonds whose credit spread is high relative to a model-implied fair spread; and momentum consists of bonds with high past returns. In addition to these individual factors, in our study we analyzed a multi-factor portfolio that combines the four factors. We found that both single-factor and multi-factor portfolios generate economically meaningful and statistically significant alphas.Our study belongs to the empirical asset pricing literature 1 documenting that factor portfolios carry a premium beyond the traditional asset class premium, as postulated by the CAPM. Even though this literature has existed for decades, it has focused predominantly on equities. The best-documented factors in the equity literature are low risk (starting with Haugen and Heins 1972), value (Basu 1977), size (Banz 1981), and momentum (Jegadeesh and Titman 1993). For corporate bonds, the evidence is both more limited and more recent. The documented factors are low risk (e.g., Ilmanen, Byrne, Gunasekera, and Minikin 2004; Frazzini and Pedersen 2014) and momentum (e.g., Pospisil and Zhang 2010; Jostova, Nikolova, Philipov, and Stahel 2013). Evidence on other factors is scarce. We are aware of only two papers on value (L'Hoir and Boulhabel 2010;Correia, Richardson, and Tuna 2012) and none on size. The existing studies on factors in the corporate bond market each focus on one particular factor, whereas in our study, we analyzed the size, low-risk, value, and momentum factors using a consistent methodology with a single dataset. OurWe offer empirical evidence that size, low-risk, value, and momentum factor portfolios generate economically meaningful and statistically significant alphas in the corporate bond market. Because the correlations between the single-factor portfolios are low, a combined multifactor portfolio benefits from diversification among the factors: It has a lower tracking error and a higher information ratio than the individual factors. Our results are robust to transaction costs, alternative factor definitions, alternative portfolio construction settings, and constructing factor portfolios on a subsample of liquid bonds. Finally, allocating to corporate bond factors provides added value beyond allocating to equity factors in a multi-asset context.

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“…Consequently, the two markets are highly segmented, as documented by Ambastha, Ben Dor, Dynkin, Hyman, and Konstantinovsky [2010]. As a result, if a large number of investors are forced to sell their holdings in these bonds within a short period around the downgrade date, it can depress prices beyond any negative effects from the information contained in the rating change announcement.…”

mentioning

confidence: 99%