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Are Capital Market Anomalies Common to Equity and Corporate Bond Markets? An Empirical Investigation

Published online by Cambridge University Press:  15 August 2017

Tarun Chordia ,
Amit Goyal ,
Yoshio Nozawa ,
Avanidhar Subrahmanyam  and
Qing Tong
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Abstract

Corporate bond returns exhibit predictability in a manner consistent with efficient pricing. Many equity characteristics, such as accruals, standardized unexpected earnings, and idiosyncratic volatility, do not impact bond returns. Profitability and asset growth are negatively related to corporate bond returns. Because firms that are profitable or have high asset growth (and hence more collateral) should be less risky, with lower required returns, the evidence accords with the risk–reward paradigm. Past equity returns are positively related to bond returns, indicating that equities lead bonds. Cross-sectional bond return predictors generally do not provide materially high Sharpe ratios after accounting for trading costs.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 4 , August 2017 , pp. 1301 - 1342
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

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Footnotes

1

We are grateful to Turan Bali (associate editor and referee) and Jennifer Conrad (the editor) for insightful and constructive comments. The views expressed herein are those of the authors and do not reflect those of the Board of Governors of the Federal Reserve System. We thank Andriy Bodnaruk, Ivan Brick, Clifton Green, Simi Kedia, Tavy Ronen, Kevin Tseng, and seminar participants at the 2014 Australasian Finance and Banking Conference, Florida International University, the 2014 Luxembourg Asset Management Summit, Rutgers University, Stockholm School of Economics, the University of Pompeu Fabra, and the University of New South Wales. Goyal thanks Rajna Gibson for her support through her National Centre of Competence in Research–Financial Valuation and Risk Management project and the Swiss Finance Institute for research project funding.

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