Systematic Risk and Yield Premiums in the Bond Market

Posted: 12 Aug 2013 Last revised: 10 Jun 2016

See all articles by Liang Fu

Liang Fu

Oakland University

Austin Murphy

Oakland University - School of Business Administration

Terry Benzschawel

Bond Portfolio Analysis & Quantitative Strategy, Citi Fixed Income Currency

Date Written: July 30, 2013

Abstract

This research shows traditional measures of systematic risk of bonds have very large downward biases and develops an improved method for calculating the market betas of credit instruments. An empirical evaluation indicates that yield spreads are highly related to such estimates of systematic risk. These betas in conjunction with yields enable estimates for the market price of risk that are empirically found to be useful indicators of future excess returns on the aggregate market. The ex-ante systematic risk premiums are discovered to be negatively related to past market returns on bonds and be positively associated with past market volatility.

Keywords: bonds, systematic risk, yield premiums, market price of risk

JEL Classification: G12

Suggested Citation

Fu, Liang and Murphy, J. Austin and Benzschawel, Terry, Systematic Risk and Yield Premiums in the Bond Market (July 30, 2013). Journal of Credit Risk, 2015, Available at SSRN: https://ssrn.com/abstract=2303970

Liang Fu

Oakland University ( email )

Rochester, MI 48309-4401
United States

J. Austin Murphy (Contact Author)

Oakland University - School of Business Administration ( email )

Varner Hall - Room 502
Rochester, MI 48309-4401
United States
248-370-2125 (Phone)
248-370-4275 (Fax)

Terry Benzschawel

Bond Portfolio Analysis & Quantitative Strategy, Citi Fixed Income Currency ( email )

390 Greenwich Street
4th Floor
New York, NY 1001
United States

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