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Explaining and benchmarking corporate bond returns

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  • Cici, Gjergji
  • Gibson, Scott
  • Moussawi, Rabih

Abstract

We evaluate how different betas and characteristics related to default, term, and liquidity risk fare against one another in explaining the cross-section of corporate bond returns. We find that characteristics-credit rating, duration, and Amihud illiquidity measure-fare better. Yields add incremental explanatory power. Consistent with yields providing a timelier assessment of default risk than ratings, bonds with higher yields but similar credit ratings, durations and Amihud measures experience more subsequent ratings downgrades, fewer upgrades, and a higher frequency of defaults. Based on our findings, we present characteristic portfolios that can be used to benchmark individual bond and portfolio returns.

Suggested Citation

  • Cici, Gjergji & Gibson, Scott & Moussawi, Rabih, 2017. "Explaining and benchmarking corporate bond returns," CFR Working Papers 17-03, University of Cologne, Centre for Financial Research (CFR).
    • Handle: RePEc:zbw:cfrwps:1703
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    7. Andrew Y. Chen & Tom Zimmermann, 2022. "Open Source Cross-Sectional Asset Pricing," Critical Finance Review, now publishers, vol. 11(2), pages 207-264, May.
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