The Cross-Section of Expected Corporate Bond Returns: Betas or Characteristics?

Cornell University; Johnson Graduate School of Management Working Paper

43 Pages Posted: 26 Aug 2001

See all articles by William R. Gebhardt

William R. Gebhardt

affiliation not provided to SSRN

Soeren Hvidkjaer

Copenhagen Business School

Bhaskaran Swaminathan

LSV Asset Management

Date Written: July 2003

Abstract

This paper finds that default betas are significantly related to the cross-section of average bond returns even after controlling for characteristics such as duration, ratings, and yield-to-maturity. Among characteristics, only yield-to-maturity is significantly related to average bond returns after controlling for default and term betas. The default and term factors are able to price the returns of beta-sorted portfolios better than they do the returns of yield-sorted portfolios. The magnitude of the ex ante Sharpe ratio generated by yield-sorted portfolios suggests non-risk based explanations. Overall, given the elusive nature of systematic risk in empirical asset pricing, the central finding of our paper is that systematic risk matters for corporate bonds.

Suggested Citation

Gebhardt, William R. and Hvidkjaer, Soeren and Swaminathan, Bhaskaran, The Cross-Section of Expected Corporate Bond Returns: Betas or Characteristics? (July 2003). Cornell University; Johnson Graduate School of Management Working Paper, Available at SSRN: https://ssrn.com/abstract=281209 or http://dx.doi.org/10.2139/ssrn.281209

William R. Gebhardt

affiliation not provided to SSRN

Soeren Hvidkjaer

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

HOME PAGE: http://www.hvidkjaer.net

Bhaskaran Swaminathan (Contact Author)

LSV Asset Management ( email )

155 North Wacker Drive
Chicago, IL 60606
United States

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