The strategy involves sorting corporate bonds by weekly returns, going long on the lowest-performing group (losers), and holding the position for one week, with rebalancing done weekly and equal weighting.
ASSET CLASS: bonds | REGION: United States | FREQUENCY:
Weekly | MARKET: bonds | KEYWORD: Large cap, US Corporate Bond, Reversal
I. STRATEGY IN A NUTSHELL
The strategy trades U.S. corporate bonds, going long the past week’s worst performers and holding for one week, with weekly rebalancing and equal-weighted positions.
II. ECONOMIC RATIONALE
Corporate bonds exhibit short-term reversal due to market underreaction to firm-specific news and liquidity provision effects, creating opportunities for weekly long positions in prior losers.
III. SOURCE PAPER
Cross-sectional Examination of the Corporate Bond Market Performance – The Rise of the Momentum and Contrarian Unidentified Factor Mimicking Corporate Bond Portfolios! [Click to Open PDF]
Himanshu Verma, Johns Hopkins University – Department of Economics; Ahmad Ajakh, Johns Hopkins University – Carey Business School; Jim Kyung-Soo Liew, Johns Hopkins University – Carey Business School
<Abstract>
We examine momentum and reversal anomalies in corporate bond returns at the firm-level employing a novel dataset, SoKat Credit, comprising bonds of 323 of the largest and liquid companies over the period from 2002 to 2020. Our study documents significant short-term reversal in the cross-sectional of corporate bond returns concentrated at the one week interval with annualized returns on the zero investment long-short portfolio of 9.9%. We also document company-level momentum spillover effect into corporate bond returns when sorting on past equity returns, that is, our “bond-stock” strategy, which delivers annualized return of 5.0% is statistically significant and robust baring the usual suspects of caveats.
IV. BACKTEST PERFORMANCE
| Annualised Return | 12.18% |
| Volatility | 3.7% |
| Beta | N/A |
| Sharpe Ratio | 3.29 |
| Sortino Ratio | N/A |
| Maximum Drawdown | N/A |
| Win Rate | N/A |
