Time Varying Risk Premia in Corporate Bond Markets

50 Pages Posted: 26 Mar 2008

See all articles by Redouane Elkamhi

Redouane Elkamhi

University of Toronto - Rotman School of Management

Jan Ericsson

McGill University; Swedish Institute for Financial Research (SIFR)

Date Written: March, 18 2008

Abstract

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

Suggested Citation

Elkamhi, Redouane and Ericsson, Jan, Time Varying Risk Premia in Corporate Bond Markets (March, 18 2008). Available at SSRN: https://ssrn.com/abstract=1108266 or http://dx.doi.org/10.2139/ssrn.1108266

Redouane Elkamhi

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Jan Ericsson (Contact Author)

McGill University ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
(514) 398-3186 (Phone)
(514) 398-3876 (Fax)

HOME PAGE: http://people.mcgill.ca/jan.ericsson/

Swedish Institute for Financial Research (SIFR)

Drottninggatan 89
SE-113 59 Stockholm, SE-113 60
Sweden

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