A Repeat-sales Index for Pricing US Corporate Bonds

In this paper we use a repeat-sales index methodology to construct US corporate bond price indices. Using several performance tests, we show that this methodology provides superior index estimates. In particular when assets trade at infrequent and irregular intervals the repeat-sales index is superior to taking an arithmetic price average. The methodology can readily be applied to any sub-sample of bonds based on a particular characteristic, such as the rating or the maturity. We further study the sensitivity of individual bond returns to systematic market risk as measured by a repeat-sales price index. Results indicate that variations in the price index are an important determinant of the time series and of the cross-sectional variation of corporate bond returns.