Salience Theory and Corporate Bond Pricing
With: Tse-Chun Lin
We document a novel salience effect in the US corporate bond market. We find that bonds with lower salience theory (ST) value have higher returns in the subsequent month. The annualized differences in one-month holding excess returns between the lowest and highest ST deciles are 3.84% and 4.44% for equal-weighted and value-weighted portfolios. However, the salience effect is only exhibited in the most salient downside returns. These results indicate that corporate bond investors overweight salient negative returns when forming their expectations of future returns. Consequently, bonds with salient downside returns are undervalued and yield higher returns in the subsequent month.
Recommended citation: Lin, Tse-Chun and Zhang, Yaoyuan, Salience Theory and Corporate Bond Pricing (September 22, 2022). Available at SSRN: https://ssrn.com/abstract=4228611 or http://dx.doi.org/10.2139/ssrn.4228611
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