Book-to-Market, mispricing, and the cross-section of corporate bond returns

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Söhnke Bartram, Mark Grinblatt, Yoshio Nozawa

The bond market is by far the largest securities market in the world. In 2022, the global bond market totalled USD 133 trillion compared to USD 122 trillion equity market capitalisation.

Corporate bonds’ book-to-market ratios predict returns computed from transaction prices. 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, mi-crostructure, and priced-risk attributes: yield-to-maturity, bid-ask-spread, duration/maturity, credit spread/rating, past returns, coupon, size, age, industry, and structural model equity hedges. 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, small yield-to-maturity spreads, or similar-sized spreads across bonds with differing risk. A methodological innovation avoids liquidity filters and censorship that bias returns.

Söhnke Bartram is Professor of Finance at the Warwick Business School at the University of Warwick, and Research Fellow at the Centre for Economic Policy Research; Mark Grinblatt is Distinguished Research Professor at the University of California at Los Angeles Anderson School of Management; Yoshio Nozawa is Assistant Professor of Finance at the University of Toronto​.

This paper has received the Best Paper Award at the 2023 Annual Conference of the European Capital Markets Institute (ECMI). Financial support from ECMI is gratefully acknowledged.

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