Is There Froth in the Corporate Bond Market?
59 Pages Posted: 21 Aug 2017 Last revised: 30 Jan 2019
Date Written: January 29, 2019
Abstract
Applying the variance decomposition approach to corporate credit spreads, I extract time-varying long-run risk premiums on the corporate bond market portfolio that are easy to compare with the predictions of asset pricing models. The expected cash flows from corporate bonds, identified by predicting default and exercise of embedded call options, are slow-moving, while risk premiums are subject to high-frequency fluctuation and countercyclical. The variation in risk premiums on the corporate bond market portfolio is largely consistent with the CAPM benchmark with time-varying risk exposure.
Keywords: Credit Risk, Fixed Income Asset Pricing, Credit Cycle, Empirical Asset Pricing
JEL Classification: E43, E44, G12
Suggested Citation: Suggested Citation