Implementable Corporate Bond Portfolios
65 Pages Posted: 19 Dec 2016 Last revised: 7 Jun 2023
Date Written: June 6, 2023
Abstract
We investigate the scope for active investing in corporate bonds by estimating an optimal portfolio using asset characteristics. Our portfolio weights are modeled to account for the severe trading frictions present in OTC bond markets. A portfolio based on maturity, rating, coupon, and size outperforms passive benchmarks and univariate sorts after transaction costs in and out of sample. Further, it predicts macroeconomic activity, suggesting bond characteristics provide hedging against macro-fluctuations. Active funds appear constrained by narrow investment mandates from holding the optimal portfolio. Overall, while active corporate bond portfolios are feasible, institutional constraints might limit their accessibility.
Keywords: Corporate Bonds; Empirical Portfolio Choice; Characteristics
JEL Classification: G11, G12, C58, C13
Suggested Citation: Suggested Citation