A fundamental bond index including solvency criteria

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 and do not convey information efficiently, it makes sense to compensate for that and integrate elementary information on the debt issuers into the index construction process. We test how that works out on corporate bonds. We build an index that is based on firm accounting data rather than debt size, and give evidence that it serves as a market proxy.

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Notes

  1. 1.

    Calculations available from the authors upon request.

  2. 2.

    We use an independent bond market index to avoid too high correlation levels between the DEF factor and the CW benchmark.

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Acknowledgements

The authors would like to thank Valérie Mignon, Frédéric Lepetit, Valentine Ainouz and Bruce Phelps for their valuable suggestions.

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Correspondence to Lauren Stagnol.

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The views expressed in this article are those of the authors and do not necessarily reflect those of Amundi.

APPENDIX

APPENDIX

Table A1

Table A1 Definition of the solvency scores

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de Jong, M., Stagnol, L. A fundamental bond index including solvency criteria. J Asset Manag 17, 280–294 (2016). https://doi.org/10.1057/jam.2016.15

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Keywords

  • fundamental indexing
  • alternative corporate bond index
  • solvency criteria
  • market efficiency