TAILIEUCHUNG - Common factors in the performance of European corporate bonds – evidence before and after financial crisis

However, there is no study to date that examines the informational efficiency of the secondary market for loans relative to the market for bonds of the same corporation, largely due to the unavailability (at least until now) of secondary market prices of loans. Our study fills this gap in the literature. Specifically, we examine, using a unique dataset of secondary market daily prices of loans from November 1, 1999 through July 31, 2002, whether the loan market is informationally more efficient than the bond market. Given the nature of our sample period (., a time of increasing level of defaults and corporate bankruptcies), we focus our analysis. | Common factors in the performance of European corporate bonds - evidence before and after financial crisis Wolfgang Aussenegg a Lukas Goetz b and Ranko Jelic c a Department of Finance and Corporate Control Vienna University of Technology Address Theresianumgasse 27 A-1040 Vienna Austria E-mail waussen@ Phone 43 1 58801 33082 Fax 43 1 58801 33098 b UNIQA Finanz-Service GmbH Address Untere DonaustraBe 21 A-1029 Vienna Austria E-mail Phone 43 1 211 75 2012 c Department of Accounting and Finance University of Birmingham Address Birmingham B15 2TT United Kingdom E-mail Phone 44 0 121 414 5990 Fax 44 0 121 414 6238 This draft October 2011 Corresponding author Common factors in the performance of European corporate bonds - evidence before and after financial crisis Abstract This paper examines common risk factors in Euro-denominated corporate bond returns before and after recent financial crisis. Our results suggest that level and slope of interest rate and default spread term structures significantly improve the explanatory power of asset pricing models for the cross-section of corporate bonds. Further we demonstrate that corporate bonds with maturities between one and three years continue to yield statistically significant abnormal returns even after controlling for the levels and slopes of interest and default spread term structures. The abnormal returns are up to 151 basis points annually for these short term bonds and are thus of considerable economic interest. The sensitivity of corporate bond returns to interest rate level and slope risk is quite stable over time whereas the sensitivity to level and slope default risk factors changed during the period of recent financial crisis. Our results are robust to GRS-test calendar seasonality and use of alternative risk-free benchmarks. JEL classification G12 G14 G15 G30 Keywords Asset Pricing Euro Corporate Bonds Factor Models Financial Crisis Anomalies 1 1. .

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