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Common risk factors in the cross-section of corporate bond returns

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  • Bai, Jennie
  • Bali, Turan G.
  • Wen, Quan

Abstract

We investigate the cross-sectional determinants of corporate bond returns and find that downside risk is the strongest predictor of future bond returns. We also introduce common risk factors based on the prevalent risk characteristics of corporate bonds—downside risk, credit risk, and liquidity risk—and find that these novel bond factors have economically and statistically significant risk premiums that cannot be explained by long-established stock and bond market factors. We show that the newly proposed risk factors outperform all other models considered in the literature in explaining the returns of the industry- and size/maturity-sorted portfolios of corporate bonds.

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  • Bai, Jennie & Bali, Turan G. & Wen, Quan, 2019. "Common risk factors in the cross-section of corporate bond returns," Journal of Financial Economics, Elsevier, vol. 131(3), pages 619-642.
    • Handle: RePEc:eee:jfinec:v:131:y:2019:i:3:p:619-642
    DOI: 10.1016/j.jfineco.2018.08.002
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    More about this item

    Keywords

    Corporate bond; Risk factors; Downside risk; Credit risk; Liquidity risk;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products

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