Extrapolation of Minimum Daily Returns and Corporate Bond Pricing

We find that the lower the corporate bond minimum daily returns in the previous month, the higher the subsequent month’s excess returns in the cross-section. The annualized differences in one-month holding returns between the lowest and the highest minimum daily returns deciles are 6.24% and 6% for equal-weighted and value-weighted portfolios, respectively. This return predictability is stronger when the minimum daily return occurs on days closer to the month-end, suggesting that investors overextrapolate the extremely negative daily returns in corporate bond pricing. The return predictability is robust to controlling for other bond characteristics including, illiquidity, downside risk, idiosyncratic volatility, etc.