Corporate Bond Yield Spreads: A Search-based Sentiment Approach

Abstract: This study examines the effect of investor sentiment, as measured by internet search activity, on corporate bond yield spreads. Specifically, we predict systematic reversal patterns as a result of sentiment-induced mispricing: In pessimistic regimes bonds appear underpriced with higher yields than indicated by fundamental values. Subsequently, delayed price correction neutralizes irrational deviations. We also expect that high-yield issues, who are more likely to be affected by subjective valuations and limits to arbitrage, are more sensitive to changes in investor sentiment and are characterized by more pronounced reversal patterns. However, our results are neither statistically nor economically significant, providing no support for the role of investor sentiment in this context. These findings apply to a series of re-specifications with regard to our measure of sentiment. Nevertheless, these findings might prove valuable as they possibly indicate that corporate bonds display inertia in the incorporation of sentiment relative to stocks.