Faculty Publications

Title

January sentiment effect in the US corporate bond market

Document Type

Article

Keywords

Corporate bonds, Investor sentiment, Market efficiency, Yield spread

Journal/Book/Conference Title

Review of Behavioral Finance

Volume

10

Issue

4

First Page

370

Last Page

386

Abstract

Purpose: The purpose of this paper is to investigate the impact of January sentiment on investors’ asset allocation decisions in the US corporate bond market during the rest of the year. Specifically, the study evaluates if the shift in January sentiment is a predictor of corporate bond spreads from February to December. Design/methodology/approach: Using corporate bond trades reported in TRACE between 2005 and 2014, the authors examine the ability of the Index of Consumer Sentiment and the Index of Investor Sentiment to predict bond spreads over the 11 months following January. The study evaluates both the sign of the change in sentiment and the magnitude of the change in sentiment using two generalized linear models, controlling for industry, bond and firm fixed effects. Portfolios are analyzed based on yield, firm size and firm leverage. Additional analysis is performed to ensure results are robust to the impacts of the subprime financial crisis. Findings: This paper finds that the changes in the sentiment measures in January predict bond spreads associated with bond trades in the subsequent 11 months, and this phenomenon, which the authors label as the “January sentiment effect,” has opposing impacts on risky and less risky bond portfolios. Originality/value: This paper adds to the literature on the relationship between sentiment and investor’s allocation decisions. The evidence documented in this study is the first known to find that investors’ allocation decisions in a year are driven by their sentiment in January.

Original Publication Date

10-24-2018

DOI of published version

10.1108/RBF-12-2017-0119

Repository

UNI ScholarWorks, Rod Library, University of Northern Iowa

Language

en

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