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

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  • Söhnke M. Bartram
  • Mark Grinblatt
  • Yoshio Nozawa

Abstract

Methodological insights generating comprehensive transaction-based bond datasets reveal that corporate bonds’ book-to-market ratios predict returns from prices transacted days after signal observation. 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, structural model equity hedges, bid-ask-spread, duration/maturity, credit spread/rating, past returns, coupon, size, age, and industry. 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, smaller yield-to-maturity spreads, or similar-sized spreads across differing liquidity/de-fault bond-types.

Suggested Citation

  • Söhnke M. Bartram & Mark Grinblatt & Yoshio Nozawa, 2020. "Book-to-Market, Mispricing, and the Cross-Section of Corporate Bond Returns," NBER Working Papers 27655, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:27655
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    More about this item

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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