Which Factors for Corporate Bond Returns?

Review of Asset Pricing Studies, forthcoming

Posted: 4 Mar 2022 Last revised: 24 Feb 2023

See all articles by Thuy Duong Dang

Thuy Duong Dang

Leibniz Universität Hannover

Fabian Hollstein

Saarland University

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management; University of Reading - ICMA Centre

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

Dang, Thuy Duong and Hollstein, Fabian and Prokopczuk, Marcel, Which Factors for Corporate Bond Returns? (January 19, 2022). Review of Asset Pricing Studies, forthcoming, Available at SSRN: https://ssrn.com/abstract=4012601 or http://dx.doi.org/10.2139/ssrn.4012601

Thuy Duong Dang

Leibniz Universität Hannover

Königworther Platz 1
Hannover, 30167
Germany

Fabian Hollstein (Contact Author)

Saarland University ( email )

Campus
Saarbrucken, Saarland D-66123
Germany

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

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