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Behavioral biases in the corporate bond market

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  • Wei, Jason

Abstract

This paper investigates the behavioral biases in the corporate bond market through the cross-section association between retail and institutional trades and corporate bond returns. The study finds that bonds heavily bought by retail investors in one month underperform in the next month relative to bonds heavily sold, and the opposite holds for institutional investors. The alpha of the high-low portfolio (formed based on decile sorting on the buy–sell trade imbalance) relative to the usual market factors is significant for retail investors, but insignificant for institutional investors. The overall results indicate that retail investors in the corporate bond market suffer from behavioral biases but institutional investors do not. However, when the spread between the purchase and sell prices is factored into the returns, no profitable trading strategies exist, consistent with limits to arbitrage.

Suggested Citation

  • Wei, Jason, 2018. "Behavioral biases in the corporate bond market," Journal of Empirical Finance, Elsevier, vol. 46(C), pages 34-55.
    • Handle: RePEc:eee:empfin:v:46:y:2018:i:c:p:34-55
    DOI: 10.1016/j.jempfin.2017.12.003
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    2. Lifang Li & Valentina Galvani, 2021. "Informed Trading and Momentum in the Corporate Bond Market [Asset pricing with liquidity risk]," Review of Finance, European Finance Association, vol. 25(6), pages 1773-1816.
    3. Wu, Qinqin & Chou, Robin K. & Lu, Jing, 2020. "How does air pollution-induced fund-manager mood affect stock markets in China?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 28(C).
    4. Zhang, Xiaotao & Wang, Ziqiao & Hao, Jing & Liu, Jiubiao, 2022. "Stock market entry timing and retail investors' disposition effect," International Review of Financial Analysis, Elsevier, vol. 82(C).
    5. Galvani, Valentina & Li, Lifang, 2018. "Asymmetric Information, Predictability and Momentum in the Corporate Bond Market," Working Papers 2018-17, University of Alberta, Department of Economics.
    6. Wu, Qinin & Lu, Jing, 2020. "Air pollution, individual investors, and stock pricing in China," International Review of Economics & Finance, Elsevier, vol. 67(C), pages 267-287.
    7. Jakub Kubiczek, 2020. "Corporate Bond Market in Poland—Prospects for Development," JRFM, MDPI, vol. 13(12), pages 1-13, December.
    8. deHaan, Ed & Li, Jiacui & Watts, Edward M., 2023. "Retail bond investors and credit ratings," Journal of Accounting and Economics, Elsevier, vol. 76(1).

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    More about this item

    Keywords

    Corporate bond returns; Retail trades; Retail investors; Institutional trades; Institutional investors;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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