Return reversals in the bond market: Evidence and causes |
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| Institution: | 1. Department of Economics Universidade Federal de Santa Catarina, Brazil;2. Big Data Institute Universidad Carlos III de Madrid and Department of Economics Universidade Federal de Santa Catarina, Brazil;3. Department of Statistics Universidad Carlos III de Madrid, Spain;1. Montpellier Business School, 2300 Avenue des Moulins, 34080 Montpellier, France;3. Department of Investment and Financial Markets, Institute of Finance, Poznan University of Economics and Business, al. Niepodleg?o?ci 10, 61-875 Poznań, Poland;1. School of Finance, Nankai University, Tianjin, China;2. Providence University, PAIR, and NCCU-RIRC, Taiwan |
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| Abstract: | The finance literature has shown that equity returns are predictable using past returns. This study extends that literature by examining bond return predictability. Using returns constructed from dealer bid prices, we find short- to intermediate-term reversals in investment grade corporate bond returns. These reversals are larger in the first half of the sample period and consistent with the predictions of dealer inventory cost models. This supports Jegadeesh and Titman’s J. Financ. Intermed. 4 (1995) 116] assertion that daily, weekly, and monthly reversals in equity returns come from dealer inventory considerations, not behavioral biases. Finally, unlike equity returns, we find no evidence of momentum in bond returns. |
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