Time Varying Risk Premia in Corporate Bond Markets
50 Pages Posted: 26 Mar 2008
Date Written: March, 18 2008
We study the link between corporate bond risk premia and equity returns in a large panel of corporate bond transaction data. In contrast to previous work, we find that a significant part of the time variation in bond risk premia can be explained by equity implied bond risk premium estimates. We also document a large time variation in the expected loss component of bond spreads. This component is related to total asset volatility, whereas the risk premium is related to systematic volatility. In addition, we show by means of linear regressions that augmenting the set of variables predicted by typical structural models with equity-implied bond default risk premia significantly increases explanatory power.
Keywords: corporate bonds, credit risk, structural model, volatility, default risk premia, idiosyncratic risk.
JEL Classification: G12
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