Short-selling Factor in Corporate Bonds
Log in to collectAcademic paper
The Impact of Short Selling in the Cross-Section of Corporate Bond Returns
Desislava Vladimirova; Thomas Markl; Philip Messow
- ?Quoniam Asset Management GmbH
Strategy in a nutshell
This strategy targets USD-denominated bonds in the ICE Global High-Yield Index from the Financial, Utility, and Industrial sectors. Short-selling characteristics for both bonds and equities are computed daily, winsorized, and aggregated monthly. Using LASSO regression on an expanding window, the next month’s value-weighted bond returns are predicted. The portfolio goes long on the top 20% of issuers based on predictions, is equally weighted, and rebalanced monthly.
Economic rationale
The strategy assumes heavily shorted assets are likely overvalued. Unlike flow-following strategies, it invests in the least shorted bonds. Utilizing multiple short-selling metrics with LASSO regression addresses multicollinearity and data-driven coefficient selection, improving predictive accuracy and enhancing returns.