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What Drives Corporate Bond Market Betas?

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Abstract

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.

Suggested Citation

  • Abhay Abhyankar & Angelica Gonzalez, 2007. "What Drives Corporate Bond Market Betas?," ESE Discussion Papers 157, Edinburgh School of Economics, University of Edinburgh.
  • Handle: RePEc:edn:esedps:157
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    Keywords

    bond market; fixed income mutual funds; asset pricing model; variance decomposition; recursive utility; betas; factor pricing;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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