News and the Cross-Section of Expected Corporate Bond Returns
46 Pages Posted: 31 Mar 2008 Last revised: 19 Apr 2009
Date Written: October 6, 2008
We study the cross-section of expected corporate bond returns using an inter-temporal CAPM (ICAPM) with three factors: innovations in future excess bond returns, future real interest rates and future expected inflation. Our test assets are a broad range of corporate bond market index portfolios. We find that two factors - innovations about future inflation and innovations about future real interest rates - explain the cross-section of expected corporate bond returns in our sample. Our model provides an alternative to the ad hoc risk factor models used, for example, in evaluating the performance of bond mutual funds.
Keywords: Bond market, Asset pricing model, Variance decomposition
JEL Classification: G10, G12
Suggested Citation: Suggested Citation