The Impact of Short Selling in the Cross-Section of Corporate Bond Returns

This article fills the literature gap by employing the longest yet-analyzed period and introduces multiple short selling proxies to explain the relationship between short selling information and bond performance. We examine short selling signals derived from bond and equity markets and find both to be predictive of future corporate bond returns after optimization, especially for high yield securities. Additionally, we find the combination of equity and bond short selling signals to be superior to individual factors, generating positive alpha even after costs. The performance of a blended signal is robust against volatility in down markets, such as the COVID-19 pandemic. Copyright 2022 With Intelligence LLC.