Corporate Bond Factor Momentum

Factor momentum has attracted significant attention in the recent asset pricing literature, as it has been proposed as one of the potential mechanisms through which the empirical puzzle of the momentum anomaly manifests itself in financial markets. Factor momentum exploits the tendency of anomalies that have recently exhibited strong performance to continue outperforming, and of anomalies that have recently underperformed to continue doing so, in a manner analogous to cross-sectional price momentum. While the literature has devoted considerable effort to examining this phenomenon in equity markets, the question of whether a similar mechanism operates in the corporate bond market remains largely unexplored. This market represents a particularly relevant testing ground, as it has been at the center of a broader debate regarding the replicability of anomalies proposed to explain the cross-sectional variation in corporate bond returns.

Leveraging a novel, manually cleaned, and error-free dataset that consolidates information from the most widely used databases in the literature, including TRACE among others, we investigate whether a factor momentum premium exists in the corporate bond market, examining both its cross-sectional and time-series manifestations across factor subsamples comprising up to more than 140 corporate bond anomalies.

Our results show the following: (i) for certain factor subsamples, both cross-sectional and time-series factor momentum generate positive and statistically significant raw payoffs with modest economic magnitude of approximately 2.60% per year; (ii) these payoffs survive transaction cost adjustments and standard factor model risk exposures; (iii) they are not subsumed by traditional price momentum, suggesting they capture a distinct source of return variation.

This study contributes to the corporate bond literature by providing evidence of a factor momentum effect, challenging the notion that momentum is a pervasive feature of all cross-sectional anomalies, and contributing to the growing literature on factor momentum.