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January sentiment effect in the US corporate bond market

Zhongdong Chen (Department of Finance, College of Business Administration, University of Northern Iowa, Cedar Falls, Iowa, USA)
Karen Ann Craig (Department of Accounting and Finance, College of Business, Eastern Michigan University, Ypsilanti, Michigan, USA)

Review of Behavioral Finance

ISSN: 1940-5979

Publication date: 12 November 2018

Abstract

Purpose

The purpose of this paper is to investigate the impact of January sentiment on investors’ asset allocation decisions in the US corporate bond market during the rest of the year. Specifically, the study evaluates if the shift in January sentiment is a predictor of corporate bond spreads from February to December.

Design/methodology/approach

Using corporate bond trades reported in TRACE between 2005 and 2014, the authors examine the ability of the Index of Consumer Sentiment and the Index of Investor Sentiment to predict bond spreads over the 11 months following January. The study evaluates both the sign of the change in sentiment and the magnitude of the change in sentiment using two generalized linear models, controlling for industry, bond and firm fixed effects. Portfolios are analyzed based on yield, firm size and firm leverage. Additional analysis is performed to ensure results are robust to the impacts of the subprime financial crisis.

Findings

This paper finds that the changes in the sentiment measures in January predict bond spreads associated with bond trades in the subsequent 11 months, and this phenomenon, which the authors label as the “January sentiment effect,” has opposing impacts on risky and less risky bond portfolios.

Originality/value

This paper adds to the literature on the relationship between sentiment and investor’s allocation decisions. The evidence documented in this study is the first known to find that investors’ allocation decisions in a year are driven by their sentiment in January.

Keywords

  • Investor sentiment
  • Market efficiency
  • Corporate bonds
  • Yield spread

Citation

Chen, Z. and Craig, K.A. (2018), "January sentiment effect in the US corporate bond market", Review of Behavioral Finance, Vol. 10 No. 4, pp. 370-386. https://doi.org/10.1108/RBF-12-2017-0119

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Publisher

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Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited

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