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The Macroeconomic Uncertainty Premium in the Corporate Bond Market

Journal of Financial and Quantitative Analysis, Forthcoming

54 Pages Posted: 1 Jun 2017 Last revised: 6 Apr 2020

See all articles by Turan G. Bali

Turan G. Bali

Georgetown University - McDonough School of Business

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Financial Research Network (FIRN)

Quan Wen

McDonough School of Business, Georgetown University

Date Written: February 1, 2020

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 (0.40% per month) and non-investment-grade (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 heterogeneous risk aversion levels of dominant players in equities (retail investors) versus bonds (institutional investors).

Keywords: Economic uncertainty, risk premia, corporate bond returns

JEL Classification: G10, G11, C13

Suggested Citation: Suggested Citation

Bali, Turan G. and Subrahmanyam, Avanidhar and Wen, Quan, The Macroeconomic Uncertainty Premium in the Corporate Bond Market (February 1, 2020). Journal of Financial and Quantitative Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2978191 or http://dx.doi.org/10.2139/ssrn.2978191

Turan G. Bali (Contact Author)

Georgetown University - McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: https://sites.google.com/a/georgetown.edu/turan-bali

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Quan Wen

McDonough School of Business, Georgetown University ( email )

37th and O Street, NW
Washington D.C., DC 20057
United States

HOME PAGE: http://quan-wen.facultysite.georgetown.edu/home

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