Risk and return in international corporate bond markets

Corporate bond returns in major developed economies increase with lower ratings and higher residual maturity. The performance of various factor models featuring corporate, sovereign and equity markets as factors suggests that the corporate bond factor plays a dominant role in explaining the variation of corporate bond returns. From a factor model perspective, local factors contribute substantially more than global factors. The factor exposures show intuitive patterns: as ratings worsen, corporate bond β’s increase steeply, sovereign β’s decline monotonically and equity β’s show a hockey stick pattern. However, from a pricing perspective, we find little evidence against the global CAPM model.