Volatility-Adjusted Momentum in Corporate Bonds

A New Test for Cross-Sectional Momentum

AuthorsJeroen van Zundert

Paper linkhttps://papers.ssrn.com/sol3/papers.cfm?abstract_id=2880097

This strategy trades US dollar-denominated corporate bonds with at least one year to maturity and a minimum notional value of $150 million. Each month, bonds’ past six-month excess returns are volatility-adjusted (target 1.7%), ranked into deciles, and the top decile is bought while the bottom decile is shorted. Portfolios are held for six months and rebalanced monthly, with the 1st and 99th percentile bonds excluded to avoid skewed exposure. Positions are equally weighted.

Momentum in corporate bonds is driven largely by behavioral factors. Investors tend to underreact to earnings news and information diffuses slowly, causing prices to adjust gradually. This explains persistent positive returns initially, a moderate decline in the second year, and a rebound