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Reversal effect and corporate bond pricing in China

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  • Zhang, Heming
  • Wang, Guanying

Abstract

This paper documents significant price reversal in Chinese corporate bonds using transaction data from 2008 to 2018. We contribute to the existing literature by constructing a reversal factor and proposing a new corporate bond pricing model. Corporate bonds generating lower returns in the past months outperform those generating higher past returns. The reversal profits are strongest in portfolios with around 9-month formation period and disappear when the formation period reaches 12 months. After controlling for bond rating, maturity, turnover, and trading volume, the reversal effects remain significant. We construct a reversal factor and propose a four-factor model by incorporating the new factor into the default-term two-factor bond pricing model plus the bond market factor. The proposed four-factor model captures systematic risk and reversal effect well and makes a significant marginal contribution to explaining the excess return of corporate bond portfolios.

Suggested Citation

  • Zhang, Heming & Wang, Guanying, 2021. "Reversal effect and corporate bond pricing in China," Pacific-Basin Finance Journal, Elsevier, vol. 70(C).
    • Handle: RePEc:eee:pacfin:v:70:y:2021:i:c:s0927538x21001712
    DOI: 10.1016/j.pacfin.2021.101664
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    More about this item

    Keywords

    Corporate bond; Reversal effect; Factor model;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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