A Review of Corporate Bond Indices: Assessing Fluctuations in Risk Exposures

This paper analyses indices for the US market and euro-denominated corporate bond market. First, we provide a review of the various applications of bond indices and associated challenges. We then analyse the risk-return properties of corporate bond indices, as well as heterogeneity across competing indices covering the same market. The descriptive statistics indicate that the risk-return properties across most indices are relatively similar. Moreover, an analysis of the stability of the indices’ exposures to interest rate risk and credit risk reveals unstable risk exposures over time. Such instability is accentuated in indices that designed to be highly liquid and thus draw on a reduced constituent universe: the more investable the index is, the less reliable are its risk exposures. Finally, we find pronounced differences in credit and interest rate risk exposures between US and Euro indices. Overall, such differences in risk exposures, as well as their fluctuation over time, show that bond indices are implicit choices of risk exposures, and investors should consider carefully how such implicit risk choices interact with their explicit asset allocation choices.
JEL Classification: G11
Keywords: corporate bond indices, index construction, investment-grade bonds, risk exposure.