RT Journal Article SR Electronic T1 Should Equity Investors Care about Corporate Bond Prices? Using Bond Prices to Construct Equity Momentum Strategies JF The Journal of Portfolio Management FD Institutional Investor Journals SP 35 OP 49 DO 10.3905/jpm.2015.41.4.035 VO 41 IS 4 A1 Arik Ben Dor A1 Zhe Xu YR 2015 UL https://pm-research.com/content/41/4/35.abstract AB In the context of forming equity momentum portfolios, the authors examine whether corporate bond prices contain information that equity prices do not fully reflect. Using a unique sample of U.S. firms with both public equity and debt, this article compares the standard momentum portfolio’s performance dynamics, based on ranking common stocks to a second momentum portfolio (bonds in asset equity momentum, or BEAM) that ranks instead by the excess returns of bonds issued by the same set of firms. Hence, both momentum portfolios share the same initial universe of firms and include only equities, but differ in the source of the ranking information. Since 1994, the BEAM portfolio has generated an information ratio that is twice that of the standard momentum portfolio (0.66 versus 0.33), with both higher average returns and consistently lower monthly volatility. The improvement was especially large during market reversals, when the traditional equity momentum strategy performed poorly. Furthermore, the signal generated by bond prices would also have allowed long-only managers to significantly outperform the S&P 500, as firms with the best past aggregate bond returns have consistently outperformed the index by about 10% per year since 1994. All equity investors, whether they employ momentum strategies or hold short positions, may be able to benefit from looking at corporate bond prices.TOPICS: Equity portfolio management, fundamental equity analysis, portfolio management/multi-asset allocation