The bond data used in this study were obtained from Bloomberg. They consist of weekly closing bid yields calculated from the bid prices of the last transaction quotes on each Friday between January 1986 and December 1990
for a sample of corporate bonds quoted in Bloomberg. They consist of weekly closing yield calculated from bid and ask prices of the last transaction quotes each Friday between January 2014 and January 2018 for a sample of corporate bonds quoted in Bloomberg. Transactions can occur at either bid or ask price of the transaction quote. Mid points of the bid and ask prices are used for corresponding yield calculations. If there is no transaction occurring for a particular bond on a particular Friday, then the yield for that bond on that Friday is missing. For bonds that are trade on consecutive Fridays, the weekly yields are differenced to obtain the Friday-close-to-Friday-close weekly changes in individual bond yields.
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To be included in the final sample, the corporate bond must meet the following sampling criteria: The bond must be fully taxable, fixed-rate, straight debt bond; the bond is issued by an US corporation; the bond is denominated in US dollar; the bond issue must be greater than $100 million; the bond’s remaining time-to- maturity is greater than 1 year and less than 11 years (with an issue date between January 2009 and January 2015); the bond is not convertible to equity, the issuing firm’s daily common stock returns must be available from Bloomberg historical database. The first criterion excludes all the irregular bonds. The second and third criterion excludes all the bonds affected by currency rate movements. The fourth criterion excludes all small bond issues which might be susceptible to infrequent trading. The fifth criterion retains bonds of a maximum of 11 years maturity issued in the post financial crisis period, thus constricting the interest rate environment from 2009 on the lower end and the outlook period to 2025 on the upper end. The last criterion eliminates all bonds with equity-like features. These bonds could possibly behave more like stocks rather than pure bonds resulting in different correlation structure than straight bonds which can lead to misleading inferences in the lag-lead bond-stock study (Kwan, 1996). Additionally, bonds with call options have also been excluded since option features generally affect bond yields (Kwan, 1996). Bonds of firms that were acquired by (or merged with) other corporations, or delisted (went private) during the period of study have also been excluded. The final sample consists of 981 US corporate bonds issued by 343 US based firms.
Issuing firms’ Friday-close-to-Friday-close stock returns are obtained from Bloomberg. These returns are adjusted by dividends and splits that might have occurred during the specific week. The weekly returns are computed for only those stocks that were traded on consecutive Fridays. If a common stock is not traded on a Friday. its returns are missing for both that and the following week.
Similar-maturity, riskless interest rates are approximated by the interpolated yield-to-maturity of 1-, 2-, 3-, 5-, 7- and 10-year constant-maturity Treasury securities, in which the interpolation is based on the remaining time to maturities of the corporate bonds. The Friday yields-to-maturity of the constant-maturity Treasury securities are obtained from Federal Reserve Economic Data (FRED database). The Treasury series represent the best available data source for deriving similar maturity riskless bond yields. But these series come with certain limitations as pointed by Kwan (1996) – the constant maturity Treasury yields themselves interpolated yields from actively traded (fixed maturity) securities. Also, even though the time-to maturity of risky and riskless bonds are matches, their cash flows might not be, potentially leading to discrepancies in duration.
Table I provide summary statistics of weekly US corporate bond yields. This table reports pooled time-series cross-section statistics of US corporate bond yields from January 2014 to January 2018 for 981 straight bonds issued by 343 US-based firms, based on weekly observations.
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