Long-term reversals in the corporate bond market |
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| Authors: | Turan G. Bali Avanidhar Subrahmanyam Quan Wen |
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| Affiliation: | 1. McDonough School of Business, Georgetown University, 3700 O St., Washington, DC 20057, USA;2. Goldyne and Irwin Hearsh Chair in Money and Banking, Anderson Graduate School of Management, University of California at Los Angeles, 110 Westwood Plaza, Los Angeles, CA 90095, USA;1. Harvard Business School, United States;2. Princeton University, United States;1. Haas School of Business, UC Berkeley and NBER, 545 Student Services Building, Berkeley, CA 94720-1900, USA;2. Anderson School of Management, UCLA and NBER, 110 Westwood Plaza, Los Angeles, CA 90095, USA;1. Oslo Metropolitan University, Oslo Business School, Pilestredet 46, Oslo 0130, Norway;2. The Arctic University of Norway, Hansine Hansens veg 18, Tromsø N-9019, Norway;3. Department of Banking and Finance, Monash University, 900 Dandenong Rd., Caulfield East VIC 3145, Australia;1. Rutgers Business School, Rutgers University, Newark, NJ 07102, USA;2. Gies College of Business, University of Illinois at Urbana-Champaign, Champaign, IL 61820, USA;3. Yonsei Business School, Yonsei University, Seoul 03722, Republic of Korea;4. Wharton School, University of Pennsylvania, PA 19104, USA |
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| Abstract: | Long-term reversals in corporate bonds are economically and statistically significant in a comprehensive sample spanning the period 1977 to 2017. Such reversals are stronger for bonds with high credit risk and more binding regulatory, capital, and funding liquidity constraints. Bond long-term reversal is not a manifestation of the equity counterpart and is mainly driven by long-term losers. A long-term reversal factor carries a sizable premium and is not explained by long-established equity and bond market factors. Thus, past returns capture investors’ ex-ante risk assessment and the degree of institutional constraints they face, so losing bonds command higher expected returns. |
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