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Portfolio Diversification and International Corporate Bonds

Published online by Cambridge University Press:  29 July 2016

Edith X. Liu
Edith X. Liu*
Affiliation:
[email protected], Cornell University, Dyson School of Applied Economics and Management, Ithaca, NY 14853.
*
*Corresponding author: [email protected]
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Abstract

This article examines the benefits of corporate bond diversification for U.S. investors. Analysis of a newly compiled bond-level data set for 2000–2010 finds that diversification with corporate bonds can significantly reduce volatility and increase risk-adjusted returns for U.S. investors. Unlike diversification with equities, corporate bonds offer significant out-of-sample risk reduction, particularly during the recent financial crisis. Risk-reduction gains are large even when the benchmark includes international equities or when longer samples of equities and sovereign bonds are used to inform corporate bond returns. Finally, significant risk-reduction gains remain after accounting for bond characteristics, liquidity, and informational costs.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 3 , June 2016 , pp. 959 - 983
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

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