A Review of Corporate Bond Indices: Construction Principles, Return Heterogeneity, and Fluctuations in Risk Exposures

First, we review the uses of bond indices as well as the challenges involved. We then analyse the risk-return properties and the heterogeneity of the indices in each set. Although the indices in each market resemble each other, there are still some differences. Moreover, an analysis of the stability of the indices' risk exposures (interest rate and credit risks) reveals very unstable measures over time and, perhaps most importantly, this instability is accentuated in the two indices with the smallest number of bonds: the more investable the index is meant to be, the less reliable it is. Finally, we find great differences between US and euro-denominated indices: US corporate bond indices showed higher credit risk, with longer terms to maturity and hence longer durations. Therefore, choosing a bond index in US or in Europe seems to be more than just choosing a currency exposure. We ultimately conclude that investors must be aware not only of what bond indices represent but also of how such key features as risk exposures will evolve over time.