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The Cross-Section of Expected Returns in the Secondary Corporate Loan Market

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  • Mehdi Beyhaghi
  • Sina Ehsani

Abstract

Corporate loans increasingly have become an important part of portfolio management with the advent of a liquid and transparent secondary market. This paper examines the pricing of characteristics and betas in the cross-section of expected loan returns. Expected loan returns decrease with default beta. Default beta contains information not captured by rating or spread-to-maturity. Among loan characteristics, a 3-month formation momentum strategy earns a monthly premium of 122 bps. Momentum is prominent in loans issued by the lowest-rated borrowers.

Suggested Citation

  • Mehdi Beyhaghi & Sina Ehsani, 2017. "The Cross-Section of Expected Returns in the Secondary Corporate Loan Market," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 7(2), pages 243-277.
    • Handle: RePEc:oup:rasset:v:7:y:2017:i:2:p:243-277.
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    File URL: http://hdl.handle.net/10.1093/rapstu/raw010
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    Cited by:

    1. Sina Ehsani & Juhani T. Linnainmaa, 2019. "Factor Momentum and the Momentum Factor," NBER Working Papers 25551, National Bureau of Economic Research, Inc.
    2. Keßler, Andreas & Mählmann, Thomas, 2022. "Trading costs of private debt," Journal of Financial Markets, Elsevier, vol. 59(PB).
    3. Liu, Yukun & Wu, Xi, 2023. "How does shareholder governance affect the cost of borrowing? Evidence from the passage of anti-takeover provisions," Journal of Accounting and Economics, Elsevier, vol. 75(2).
    4. Wang, Xinjie & Xiao, Yaqing & Yan, Hongjun & Zhang, Jinfan, 2021. "Under-reaction in the sovereign CDS market," Journal of Banking & Finance, Elsevier, vol. 130(C).
    5. Beyhaghi, Mehdi & Nguyen, Ca & Wald, John K., 2019. "Institutional investors and loan dynamics: Evidence from loan renegotiations," Journal of Corporate Finance, Elsevier, vol. 56(C), pages 482-505.
    6. Ricardo Correa & Ai He & Christoph Herpfer & Ugur Lel, 2022. "The rising tide lifts some interest rates: climate change, natural disasters, and loan pricing," International Finance Discussion Papers 1345, Board of Governors of the Federal Reserve System (U.S.).

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