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Outliers and momentum in the corporate bond market

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  • Galvani, Valentina
  • Li, Lifang

Abstract

How we filter outliers matters in empirical research. As a demonstration, we analyze how momentum returns respond to different outlier treatments in the corporate bond market TRACE database. We find that momentum profitability depends crucially on return outliers. Specifically, outlier trimming vanishes momentum returns, whereas winsorization yields a robust but conservative assessment of the momentum effect. Positive outliers are better than negative ones at identifying bonds that display return continuation and, thus, yield momentum gains. Price and volume-based sample treatments show that momentum gains stem from low-priced bonds and bonds solely traded by retail investors. Lastly, finer partitions of the bond cross-section deliver superior momentum gains without sacrificing portfolio diversification over bonds and issuers.

Suggested Citation

  • Galvani, Valentina & Li, Lifang, 2023. "Outliers and momentum in the corporate bond market," The Quarterly Review of Economics and Finance, Elsevier, vol. 89(C), pages 135-148.
    • Handle: RePEc:eee:quaeco:v:89:y:2023:i:c:p:135-148
    DOI: 10.1016/j.qref.2023.02.007
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    More about this item

    Keywords

    Momentum; Outliers; Winsorization; Corporate bonds; TRACE;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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