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What Drives Corporate Bond Market Betas?

We study the cross-section of expected corporate bond returns using an intertemporal CAPM with three factors; innovations in future excess bond returns, future real interest rates and future expected inflation. Our test assets are a broad range of bond market index portfolios of different default categories. We find, using the Fama MacBeth cross-sectional method, that innovations in future expected real interest rates and future expected inflation explain the cross-section of expected corporate bond returns. Our model provides an alternative to ad hoc risk factors used, for example, in evaluating the performance of bond mutual funds.

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Paper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 157.

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Length: 34
Date of creation: 19 Jul 2007
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Handle: RePEc:edn:esedps:157
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