Presenter: Cesare Robotti, Warwick Business School

Title: Common pitfalls in the evaluation of corporate bond strategies

Abstract: We argue that the documented large abnormal returns to investors from a wide array of corporate bond strategies mainly stem from ignoring market microstructure noise in transaction-based bond prices and relying on (ad hoc and asymmetric) out-of-sample return trimming or winsorization. To address these issues, we construct bond data that is largely free of microstructure noise and closely mimics industry-grade quote data. We revisit prior findings in the literature and provide conclusive evidence that most bond anomaly portfolios/factors, once properly constructed, generate negligible average returns and alphas. Finally, we show that the considered factors (and their underlying signals) are only weakly related to average bond returns.

Host: Jonas Nygaard Eriksen