The Short-Term Corporate Bond Anomaly

This paper finds that common risk factors significantly underestimate the returns on corporate bonds with a short maturity. A substantial portion of short-term corpo-rate bond returns is independent of risk premiums associated with market risk, term and default risk, yield curve dynamics, liquidity risk and premiums associated with macro-economic variables. Comparable evidence of the short-term corporate bond anomaly also shows up in portfolios of corporate bond mutual funds, indicating that the anomaly withstands important practical issues, such as short-selling restrictions, transaction costs, and illiquidity