Replication of BBW Factors with WRDS Data

The WRDS Corporate Bond Database, introduced in April 2017, offers a clean and publicly accessible dataset for corporate bond research. In this article, we construct and replicate the Bai, Bali, and Wen (2019, BBW) factors using the WRDS bond returns with the SAS codes in the appendix. Using the WRDS data, we find significant average returns on the downside risk (DRF), credit risk (CRF), liquidity risk (LRF), and short-term reversal (REV) factors. When we horse race between the CAPM and BBW factor models, we find that there is no significant alpha on the bond market factor controlling for the DRF, CRF, and LRF factors, indicating that the aggregate bond market factor of the CAPM is a mixed bag of the common risk factors in bond returns (DRF, CRF, and LRF). Similarly, the CAPM alphas on the DRF, CRF, and LRF factors are statistically insignificant controlling for the bond market factor. When we further investigate the relative performance of the CAPM vs. BBW, we find that BBW has a higher tangent portfolio Sharpe ratio than the CAPM. Overall, the results from WRDS data show that the market risk of corporate bonds can be viewed as an assemblage of downside, credit, and liquidity risks in the bond market