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The Macroeconomic Uncertainty Premium in the Corporate Bond Market

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  • Bali, Turan G.
  • Subrahmanyam, Avanidhar
  • Wen, Quan

Abstract

We examine the role of macroeconomic uncertainty in the cross section of corporate bonds and find a significant uncertainty premium for both investment-grade (IG) (0.40% per month) and non-investment-grade (NIG) (0.81% per month) bonds. The economic-uncertainty premium declines as we progressively remove downgraded bonds, indicating that the premium represents an increase in required returns for bonds with higher credit and macroeconomic risk. The economic-uncertainty premia vary across equities and bonds in a manner consistent with the heterogeneous risk-aversion levels of dominant players in equities (retail investors) versus bonds (institutional investors).

Suggested Citation

  • Bali, Turan G. & Subrahmanyam, Avanidhar & Wen, Quan, 2021. "The Macroeconomic Uncertainty Premium in the Corporate Bond Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 56(5), pages 1653-1678, August.
    • Handle: RePEc:cup:jfinqa:v:56:y:2021:i:5:p:1653-1678_5
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    Cited by:

    1. Daxuan Cheng & Yin Liao & Zheyao Pan, 2023. "The geopolitical risk premium in the commodity futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(8), pages 1069-1090, August.
    2. Dickerson, Alexander & Mueller, Philippe & Robotti, Cesare, 2023. "Priced risk in corporate bonds," Journal of Financial Economics, Elsevier, vol. 150(2).
    3. Marton Lotz & Daniel Ruf & Johannes Strobel, 2023. "Uncertainty premia in REIT returns," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 51(2), pages 372-407, March.
    4. Usman, Adam, 2022. "Cash holdings and real asset liquidity," International Review of Financial Analysis, Elsevier, vol. 83(C).
    5. Joost Bats & Giovanna Bua & Daniel Kapp, 2023. "Physical and transition risk premiums in euro area corporate bond markets," Working Papers 761, DNB.
    6. Zhaobo Zhu & Licheng Sun & Jun Tu & Qiang Ji, 2022. "Oil price shocks and stock market anomalies," Post-Print hal-03712237, HAL.
    7. Bats, Joost Victor & Bua, Giovanna & Kapp, Daniel, 2024. "Physical and transition risk premiums in euro area corporate bond markets," Working Paper Series 2899, European Central Bank.
    8. Dirk Broeders & Marleen de Jonge & David Rijsbergen, 2024. "The European Carbon Bond Premium," Working Papers 798, DNB.
    9. Lee, Kiryoung, 2022. "Which uncertainty measures matter for the cross-section of corporate bond returns? Evidence from the U.S. during 1973–2020," Finance Research Letters, Elsevier, vol. 48(C).
    10. Treepongkaruna, Sirimon & Chan, Kam Fong & Malik, Ihtisham, 2023. "Climate policy uncertainty and the cross-section of stock returns," Finance Research Letters, Elsevier, vol. 55(PA).
    11. Zhang, Heming & Wang, Guanying, 2021. "Reversal effect and corporate bond pricing in China," Pacific-Basin Finance Journal, Elsevier, vol. 70(C).
    12. Andrade, Sandro C. & Ekponon, Adelphe & Jeanneret, Alexandre, 2023. "Sovereign risk premia and global macroeconomic conditions," Journal of Financial Economics, Elsevier, vol. 147(1), pages 172-197.
    13. Liu, Wei & Garrett, Ian, 2023. "Regime-dependent effects of macroeconomic uncertainty on realized volatility in the U.S. stock market," Economic Modelling, Elsevier, vol. 128(C).
    14. Simon Rudkin & Wanling Qiu & Pawel Dlotko, 2021. "Uncertainty, volatility and the persistence norms of financial time series," Papers 2110.00098, arXiv.org.
    15. deHaan, Ed & Li, Jiacui & Watts, Edward M., 2023. "Retail bond investors and credit ratings," Journal of Accounting and Economics, Elsevier, vol. 76(1).
    16. Jochen Güntner & Benjamin Karner, 2023. "The bond agio premium," Economics working papers 2023-13, Department of Economics, Johannes Kepler University Linz, Austria.

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