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Book-to-Market, Mispricing, and the Cross Section of Corporate Bond Returns

Published online by Cambridge University Press:  12 February 2024

Söhnke M. Bartram Open the ORCID record for Söhnke M. Bartram [Opens in a new window] ,
Mark Grinblatt Open the ORCID record for Mark Grinblatt [Opens in a new window]  and
Yoshio Nozawa Open the ORCID record for Yoshio Nozawa [Opens in a new window]
Söhnke M. Bartram*
Affiliation:
Warwick Business School, University of Warwick and Centre for Economic Policy Research (CEPR)
Mark Grinblatt
Affiliation:
UCLA Anderson School of Management and NBER mark.grinblatt@anderson.ucla.edu
Yoshio Nozawa
Affiliation:
UTSC and Rotman School of Management, University of Toronto yoshio.nozawa@rotman.utoronto.ca
*
s.m.bartram@wbs.ac.uk (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

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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 risks. A methodological innovation avoids liquidity filters and censorship that bias returns.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , First View , pp. 1 - 49
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2024. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

Helpful comments and suggestions by an anonymous referee, Jonathan Berk, Hendrik Bessembinder (the editor), Philip Bond, Michael Brennan, Jaewon Choi, Jens Dick-Nielsen, Darrell Duffie, Andrea Eisfeldt, Eugene Fama, Gordon Gemmill, Valentin Haddad, Patrick Houweling, Gergana Jostova, Owen Lamont, Alfred Lehar, Dmitry Livdan, Francis Longstaff, Florencio Lopez de Silanes Molina, Tyler Muir, Rob Neal, Stavros Panageas, Lubos Pastor, Alexander Philipov, Yves Rannou, Lukas Schmid, Clemens Sialm, Zorka Simon, Avanidhar Subrahmanyam, Pierre-Olivier Weil, and seminar participants at the 2023 Utah Winter Finance Conference, 2023 Jackson Hole Finance Conference, 2023 ECMI Conference, 2023 CFA Society Poland Conference, 2022 Midwest Finance Association Conference, 2021 European Finance Association Conference, 2021 Eastern Finance Association Conference, 2021 European Economic Association Conference, 2021 French Finance Association, 2021 Frontiers of Factor Investing Conference, 8th SAFE Asset Pricing Workshop 2021, CFA Society Germany, CFA Society Singapore, Coventry University, Frankfurt School of Finance and Management, Georgia State University, Robeco, Technische Universität München, Two Sigma, UCLA, University of Bath, University of Sydney, University of Warwick, University of Washington Foster School, and Xiamen University are gratefully acknowledged. Bartram gratefully acknowledges the Humboldt Research Award of the Alexander von Humboldt Foundation. We thank the ACATIS Investment Kapitalverwaltungsgesellschaft mbH, Center for Investing at HKUST, the European Capital Markets Institute (ECMI), the Fink Center for Finance and Investments, the Price Center for Entrepreneurship and Innovation, the Ziman Center for Real Estate, and the Rosalinde and Arthur Gilbert Program in Real Estate, Finance and Urban Economics for generous funding.

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