The Hunt for a Low-Risk Anomaly in the USD Corporate Bond Market

Abstract

Low-risk (i.e., low-beta) equities have been found to have higher risk-adjusted returns than do their high-risk (high-beta) counterparts. This is a low-risk anomaly. Some argue that this phenomenon is ubiquitous in financial markets. Do U.S. corporate bonds show the same phenomenon? To investigate, the authors sort corporate bonds according to various common risk measures and examine whether risk-adjusted returns decline as risk measure, they find conflicting evidence of a low-risk anomaly. Risk measures that are poor at sorting bonds by risk show evidence of an anomaly. However, risk measures that are good at identifying ex ante risk show little evidence to support a low-risk anomaly. In general, the authors find little evidence to support a low-risk anomaly in corporate bonds.