Decomposing the Returns on European Corporate Debt

48 Pages Posted: 25 Mar 2008 Last revised: 17 Nov 2021

See all articles by Antje Berndt

Antje Berndt

Australian National University, College of Business and Economics

Iulian Obreja


Date Written: April 4, 2008


Common variation in the prices of defaultable securities may not always be associated with a rational response to an increase in the relative importance of a macroeconomic risk factor. Building on Campbell's ICAPM framework, we show that risk premia of assets with nonlognormal return distributions represent compensation not only for exposure to macroeconomic factors but also for unexpected revisions to these assets' return distributions, such as sudden increases in the likelihood of extreme events. If these revisions are made almost simultaneously across assets - perhaps as a systemic response to adverse credit-market events - they induce covariation in risk premia unrelated to the time variation of priced macroeconomic factors. Evidence from the European corporate bond market supports this theory. Asset pricing tests also document patterns consistent with the "flight-to-quality'' effect for European corporate debt.

Keywords: European credit and bond markets, decomposing returns, risk factors

JEL Classification: G12, G13, G15

Suggested Citation

Berndt, Antje and Obreja, Iulian, Decomposing the Returns on European Corporate Debt (April 4, 2008). ECB Working Paper No. 805, Available at SSRN: or

Antje Berndt (Contact Author)

Australian National University, College of Business and Economics ( email )

Australian National University
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Canberra, ACT 2601

HOME PAGE: http://

Iulian Obreja

SEC ( email )

450 Fifth Street, NW
Washington, DC 20549-1105
United States

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