Is Momentum Spanned Over Corporate Bonds of Different Ratings?

Abstract

This paper investigates whether momentum exists in the corporate bond market. Instead of relying on the price information from just a single time horizon, we incorporate all trend signals in the short, intermediate and long terms simultaneously. Using this informationally efficient strategy, we uncover strong and significant momentum for all bonds across ratings. Interestingly, bond momentum earns roughly the same amount of return as stock momentum, but has little correlation with the latter. The effect of bond momentum is robust to various controls of risk factors, bond characteristics, and transaction costs, and is stronger after the establishment of TRACE and during periods with low sentiment or low growth. Overall, momentum appears to be the most pronounced cross-sectional anomaly emerged from the bond market that challenges the existing rational pricing theory of corporate bonds.