Which Factors for Corporate Bond Returns?
Review of Asset Pricing Studies, forthcoming
Posted: 4 Mar 2022 Last revised: 24 Feb 2023
Date Written: January 19, 2022
Abstract
Factors related to carry, duration, equity momentum, and the term structure are the most important risk factors in corporate bond markets. From a large set of factor candidates, we condense an optimal model with a two-step approach. First, we filter out factors that do not systematically move bond prices. Second, we use a Bayesian model selection approach to determine the optimal, parsimonious model. Many prominent factors do not move prices, or are redundant. We document the new model's good performance compared to that of existing models in time-series and cross-sectional tests and analyze the economic drivers of the factors.
Keywords: Corporate bonds, risk factors, model comparison
JEL Classification: G12, C11, C52
Suggested Citation: Suggested Citation