Corporate Bond Indices

June 22, 2012

Endnotes And References

  1. Fitch, Q1-2012 Quarterly European Senior Fixed Income Survey.
  2. ETF Industry Association March 2012 ETF Data Reports,
  3. Sangvinatsos (2010) discusses how corporate bond indices could be integrated with other asset classes such as stocks and Treasuries in constructing optimal portfolios (also see Korn and Koziol (2006) and Meindl and Primbs (2006) who discuss bond portfolio optimisation). Cai and Jiang (2008) study corporate bond returns and volatility, and Arnott et al. (2010) apply characteristics-based indexing to fixed income.
  4. A higher weight for an issuer with a high market value of debt does not necessarily mean that the index is overweighting issuers with a high face value of debt. An issuer with a high amount of par value debt outstanding will only get a high weight if the market value is relatively close to par value, which implies that the issuer is not perceived to be very risky. It is therefore not clear why the market value-weighted index should become riskier. In addition, loading onto riskier issuers shouldn’t be a problem if this risk is rewarded by higher expected returns. Note that Davis et al. (2010) and Reinhart and Rogoff (2009) have argued that indebtedness doesn’t necessarily matter for default, nor for yields or returns, which suggests that the debt level is not associated with the riskiness of a bond.
  5. Goltz, F. EDHEC-Risk Institute. “Indices in Institutional Investment Management: results of a European survey 2010.”
  6. Outstanding debt changes over time and the information on changes is not always public. If an index includes callable bonds, for instance, the amount outstanding can change drastically over time (even when no bond matures), complicating the calculation of cap-weighted indices (Reilly et al. 1992).
  7. Sometimes, for Canadian dollar securities only, Fitch is replaced by DBRS in the rating selection.
  8. For instance, inclusion in an index could be based on the lowest rating (“most conservative”) of the three agencies, or the average of the ratings, or a median or “two out of three” rating. Index providers usually use a combination of methodologies.
  9. For the sake of simplicity and easy access to data we use duration in this article. However, Duration Time Spread (DTS) has been advocated to be a better and more robust measure of portfolio risk (Ben Dor et al. 2005).
  10. Goltz F., and C. Campani, EDHEC-Risk Institute, June 2011: “A Review of Corporate Bond Indices.”
  11. Siegel (2003) says the duration of an index is an “historical accident”. Duration is a measure of bonds’ risk exposure to interest rate changes, as beta is a stock’s risk exposure to market movements. Although the beta of the market is always 1, there is no “neutral” duration of the corporate bond market. Siegel (2003) concludes that the choice of duration is an active asset allocation decision that should not be left to the index.
  12. Goltz, F. EDHEC-Risk Institute “Indices in Institutional Investment Management: results of a European survey 2010.”
  13. The amount of debt outstanding is usually the main measure of liquidity. The iBoxx liquid indices are designed with investment-grade bonds representing “the most actively traded portion of the market”. All bonds must have a specific minimum amount outstanding in order to be eligible for the indices (Sovereigns €4bn, Sub-Sovereigns €2bn, corporates €750m, other bonds €1bn). A liquidity criterion specifies a minimum daily traded amount (€150m in nominal traded, for instance).

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