Common pitfalls in the evaluation of corporate bond strategies

Abstract

We argue that the documented large abnormal returns to investors from corporate bond anomalies such as return reversals and momentum mainly stem from ignoring market microstructure noise in transaction-based bond prices and relying on ad hoc return 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 anomalies, once properly constructed, generate negligible average returns and alphas. Finally, we show that the considered factors (and their underlying signals) are not related to average bond returns.

Presented by Cesare Robotti