Publications & Working Papers:

Computing corporate bond returns: a word (or two) of caution. Co-authored with Dr. Diogo Palhares and Professor Scott Richardson. Published at the Review of Accounting Studies (2023).

Abstract: We offer several suggestions for researchers using corporate bond return data. First, despite clear instructions from older papers (e.g., Bessembinder et al. 2009) about the correct way to compute credit excess returns, a lot of recent research simply subtracts a Treasury-bill return. We show that this imprecision is likely to contaminate inferences as the rate component of returns is negatively correlated to the spread component. This is a problem for all research looking at corporate bonds returns, especially time series analysis and safer corporate bonds (e.g., Investment Grade). Second, we note significant differences in coverage of corporate bonds across the Trade Reporting and Compliance Engine (TRACE) platform and typical corporate bond indices. We provide some simple rules for researchers using TRACE to select a subset of bonds closest to those contained inside corporate bond indices used by institutional investors. Third, we note differential quality in the prices and hence returns between TRACE and typical corporate bond indices. Corporate bond returns provided by corporate bond indices (i) correctly estimate credit excess returns, (ii) are synchronous for the entire set of bonds allowing for consistent cross-sectional comparability, and (iii) suffer less from stale pricing issues. Where possible researchers should try to source return data from multiple sources to ensure the robustness of their results due to these coverage and data quality issues.