Book-to-Market, Mispricing, and the Cross-Section of Corporate Bond Returns

Abstract

Methodological insights generating comprehensive transaction-based bond datasets reveal that corporate bonds' book-to-market ratios predict returns from prices transacted days after signal observation.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, microstructure, and priced-risk attributes: yield-to-maturity, structural model equity hedges, bid-ask-spread, duration/maturity, credit spread/rating, past returns, coupon, size, age, and industry.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, smaller yield-tomaturity spreads, or similar-sized spreads across differing liquidity/de-fault bond-types.

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