Systematic Risk and Yield Premiums in the Bond Market
Posted: 12 Aug 2013 Last revised: 10 Jun 2016
Date Written: July 30, 2013
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: Suggested Citation