Do the Distributional Characteristics of Corporate Bonds Predict Their Future Returns?

Abstract

We investigate whether the distributional characteristics of corporate bonds predict the cross-sectional differences in future bond returns. The results indicate a significantly positive (negative) link between volatility (skewness) and expected returns, whereas kurtosis does not make a robust incremental contribution to predictability. These findings remain intact after controlling for transaction costs, liquidity, and bond characteristics. We also propose new risk factors based on the distributional moments of corporate bond returns and show that these factors represent an important source of common return variation missing from the long-established stock and bond market factors.

Keywords: Corporate Bond Returns, Volatility, Skewness, Kurtosis, Return Predictability, Risk Factors

JEL Classification: G10, G11, C13