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The determinants of corporate bond yields

  • Liu, Sheen
  • Shi, Jian
  • Wang, Junbo
  • Wu, Chunchi

Previous studies have found that common factors explain a high proportion of corporate bond yields. In this paper, we test whether there is a systematic risk premium beyond that implied by a risk-neutral term structure model. We propose a reduced-form term structure model that incorporates both default and tax effects. After controlling the effects of personal taxes and default risk, empirical tests show that at least two of the Fama-French factors are important for corporate bond yields. Our results suggest that term structure models should incorporate aggregate common risk factors in order to better explain the dynamics of corporate bond yields.

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File URL: http://www.sciencedirect.com/science/article/B6W5X-4R7RS9P-3/2/7404d1628882ab88a0acbcd646fd5806
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Article provided by Elsevier in its journal The Quarterly Review of Economics and Finance.

Volume (Year): 49 (2009)
Issue (Month): 1 (February)
Pages: 85-109

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Handle: RePEc:eee:quaeco:v:49:y:2009:i:1:p:85-109
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620167

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