Arvind Mahajan
Professor, Texas A&M University, USA.
Hwagyun Kim
Texas A&M University, USA.
Alex Petkevich
Texas A&M University, USA.Sources of Momentum in Bonds
This paper studies momentum in bonds via aggregate default. Our
empirical results are highlighted as follows. Momentum in corporate
bonds is mainly observed during periods of high default shocks and
driven by losers. Conditional default risks are priced in the cross-
section of corporate bond portfolios. The recovery value of bondholders
in financial distress matters in explaining this. Losers have relatively
higher recovery potentials and, hence, become less risky when high
default shocks occur, leading to lower expected returns. Consistent
with this, government bonds feature no momentum, while sovereign
bonds do. A theoretical model is provided to justify the findings.