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

75 Pages Posted: 14 Jan 2015 Last revised: 11 Nov 2016

See all articles by Jennie Bai

Jennie Bai

Georgetown University - Department of Finance

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Quan Wen

Georgetown University - Department of Finance

Date Written: Novemeber 2016

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

Suggested Citation

Bai, Jennie and Bali, Turan G. and Wen, Quan, Do the Distributional Characteristics of Corporate Bonds Predict Their Future Returns? (Novemeber 2016). Georgetown McDonough School of Business Research Paper No. 2548562. Available at SSRN: https://ssrn.com/abstract=2548562 or http://dx.doi.org/10.2139/ssrn.2548562

Jennie Bai

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States

HOME PAGE: http://www.jenniebai.com

Turan G. Bali (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: http://faculty.msb.edu/tgb27/

Quan Wen

Georgetown University - Department of Finance ( email )

37th and O Street, NW
Washington D.C., DC 20057
United States

HOME PAGE: http://faculty.georgetown.edu/qw50

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