Noisy Prices and Return-Based Anomalies in Corporate Bonds

with Alexander Dickerson and Giulio Rossetti, 2023, working paper.

[Paper] We argue that the documented large abnormal returns to investors from corporate bond anomalies
such as return reversals and momentum mainly stem from ignoring market microstructure noise in
transaction-based bond prices and relying on ad hoc return winsorization. To address these issues,
we construct bond data that is largely free of microstructure noise and closely mimics industry-grade
quote data. We revisit prior findings in the literature and provide conclusive evidence that
return-based anomalies, once properly constructed, generate negligible average returns and alphas.
Finally, we show that the considered return-based factors (and their underlying signals) are not
related to average bond returns.