Pricing anomaly: Tale of two similar credit-rated bonds with different yields

Mohamed Ariff, Alireza Zarei, M. Ishaq Bhatti

Research output: Chapter in Book/Report/Conference proceedingChapterpeer-review


Bond valuation theory suggests that returns to investors of similarlyrated bonds ought to be the ame. This study reports practice-relevant anomalous investment returns behavior of two types of bonds - Type A and Type B - which have similar cashflow-relevant characteristics. But the average and median returns on Type A bond are significantly different from those of Type B returns. We collected time series data on A and B bonds, all being coupon-paying bonds with similar rating and similar tenor as two matched samples traded in a bond exchange. To ensure the results are extended to different bond sectors, the data set was separated into treasury bonds as risk-free and corporate bonds as risky ones. We further subdivide the data set into short-, medium-, and long-tenor bonds. Since the data straddles the Global Financial Crisis period, we use appropriate econometric method to control the possible effect from the crisis. The test results show significant and systematic differences: treasury bonds of Type A yield lower than treasury bonds of Type B,i.e. the yields of corporate Type A bonds are higher than the yields of Type B bonds. We observe these findings constitute a puzzle, being anomalous to theory.

Original languageEnglish
Title of host publicationThe Growth of Islamic Finance and Banking
Subtitle of host publicationInnovation, Governance and Risk Mitigation
EditorsHussain Qadri, M Ishaq Bhatti
PublisherTaylor and Francis - Balkema
Number of pages21
ISBN (Electronic)9780429553035
ISBN (Print)9780367205881
Publication statusPublished - 18 Sept 2019
Externally publishedYes

Bibliographical note

Publisher Copyright:
© 2020 selection and editorial matter, Hussain Mohi-ud-Din Qadri and M. Ishaq Bhatti All rights reserved.

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)
  • Business, Management and Accounting(all)


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