Summary

ABSTRACT

Doubts are rising whether bond indices, in the way they are constructed, are effective in their role of representing the markets they are designed for. Since index constituents are defined on market shares –the larger the debt obligation, the larger the share in the index– it may be that certain risks related to a high level of indebtedness are being accentuated which are not necessarily representative for the market as a whole.

Undue debt levels would in theory not arise in an information-efficient market, however, if prices are distorted, it makes sense to compensate for that and add elementary information on the debt issuers to the index construction process. We test how that works out on corporate bonds. We build a bond index that is based on firm accounting data rather than debt size, and give evidence that it may serve as a market proxy.

Amundi Working Paper -November 2015

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Authors

Marielle DE JONG
PhD, Head of Fixed-Income Quantitative Research
RC - Author - STAGNOL Lauren
Lauren STAGNOL
Equity Quant Portfolio Strategy, Amundi Investment Institute