Trading Corporate Bonds Is Still More Art Than Science

Two years ago, the Journal of Finance — the most prestigious journal in the field — retracted a published paper because of data errors, either the first or second withdrawal ever by a top-three finance journal. Now the Journal of Financial Economics, another influential publication, has made its own retraction. This is causing some people to declare a replication crisis in finance — missing the point entirely.

The retraction of the 2019 Journal of Financial Economics paper, “Common Risk Factors in the Cross-Section of Corporate Bond Returns,” is actually a story of science working. This is particularly true for the nascent field of research on the corporate bond market, where data is far murkier than in most other markets.

Let me take a few steps back to explain.

In 2005, Stanford professor John Ioannidis published his seminal paper, “Why Most Published Research Findings Are False.” This does not mean most academic authors are dishonest, although dishonesty is the problem for some papers. The larger issue is that few academics can publish the quantity of high-quality research that promotion and tenure committees demand, not to mention what university public relations departments encourage.

That leads to massaging data, misrepresenting results, exaggeration, rushing to publication with insufficient vetting and reworking the same research in multiple papers. Peer review makes things worse, enforcing conformity rather than auditing results and ensuring quality.

Nevertheless, in most fields, knowledge progresses despite the many false papers for two main reasons. First, most published research findings are ignored and, therefore, do little harm. Second, the research findings that attract attention are checked both by people trying to replicate the original claims and by those doing follow-on work with different data and methodologies.