Journal of Financial and Quantitative Analysis Vol. 60 No. 3 2025
Book-to-Market, Mispricing, and the Cross Section of Corporate Bond Returns
Abstract
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, microstructure, 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 risks. A methodological innovation avoids liquidity filters and censorship that bias returns.
- DOI
- 10.1017/s0022109024000048
- Volume
- 60
- Issue
- 3
- Pages
- 1185-1233
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib