Investor sentiment and corporate bond yield spreads
Article first published online: 7 JUN 2010
Copyright © 2010 John Wiley & Sons, Ltd.
Review of Behavioral Finance
Volume 2, Issue 2, pages 59–80, November 2010
How to Cite
Nayak, S. (2010), Investor sentiment and corporate bond yield spreads. Rev. Behav. Fin., 2: 59–80. doi: 10.1002/rbf.9
- Issue published online: 24 NOV 2010
- Article first published online: 7 JUN 2010
- investor sentiment;
- corporate bonds;
- bond yield spreads;
- predictable trends
Although the pervasive influence of investor sentiment in equity markets is well documented, little is known about behavioral manifestations in bond markets. In this paper, we explore the impact of investor sentiment on corporate bond yield spreads. Our results reveal that bond yield spreads co-vary with sentiment, and sentiment-driven mispricings and systematic reversal trends are very similar to those for stocks. Bonds appear underpriced (with high yields) during pessimistic periods and overpriced (with low yields) when optimism reigns. Consequent reversals result in predictable trends in post-sentiment yield spreads. When beginning-of-period sentiment is low, subsequent yield spreads are low; high sentiment periods are followed by high spreads. High-yield bonds (low ratings, Industrials and Utilities, extreme maturities or low durations, specially if low rated) demonstrate greater susceptibility to mispricings due to sentiment compared to low-yield bonds. The incremental yield spread gap between high- and low-yield bonds converges subsequent to periods of low sentiment, and diverges after high sentiment. Equity attributes marginally influence the impact of sentiment on bond spreads, but mostly for distressed bonds only. Copyright © 2010 John Wiley & Sons, Ltd.