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Long-term reversals in the corporate bond market

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  • Bali, Turan G.
  • Subrahmanyam, Avanidhar
  • Wen, Quan

Abstract

Long-term reversals in corporate bonds are economically and statistically significant in a comprehensive sample spanning the period 1977 to 2017. Such reversals are stronger for bonds with high credit risk and more binding regulatory, capital, and funding liquidity constraints. Bond long-term reversal is not a manifestation of the equity counterpart and is mainly driven by long-term losers. A long-term reversal factor carries a sizable premium and is not explained by long-established equity and bond market factors. Thus, past returns capture investors’ ex-ante risk assessment and the degree of institutional constraints they face, so losing bonds command higher expected returns.

Suggested Citation

  • Bali, Turan G. & Subrahmanyam, Avanidhar & Wen, Quan, 2021. "Long-term reversals in the corporate bond market," Journal of Financial Economics, Elsevier, vol. 139(2), pages 656-677.
    • Handle: RePEc:eee:jfinec:v:139:y:2021:i:2:p:656-677
    DOI: 10.1016/j.jfineco.2020.08.007
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    More about this item

    Keywords

    Corporate bonds; Long-term reversal;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • 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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