Common Risk Factors in the Cross-Section of Corporate Bond Returns

Journal of Financial Economics, Forthcoming

HKUST Finance Symposium 2016: Active Investing and Arbitrage Capital

75 Pages Posted: 3 Oct 2016 Last revised: 12 Feb 2018

See all articles by Jennie Bai

Jennie Bai

Georgetown University - McDonough School of Business; National Bureau of Economic Research (NBER)

Turan G. Bali

Georgetown University - McDonough School of Business

Quan Wen

McDonough School of Business, Georgetown University

Date Written: February 2018

Abstract

We investigate the cross-sectional determinants of corporate bond returns and find that downside risk is the strongest predictor of future bond returns. We also introduce common risk factors based on the prevalent risk characteristics of corporate bonds -- downside risk, credit risk, and liquidity risk -- and find that these novel bond factors have economically and statistically significant risk premia that cannot be explained by long-established stock and bond market factors. We show that the newly proposed risk factors outperform all other models considered in the literature in explaining the returns of the industry- and size/maturity-sorted portfolios of corporate bonds.

Keywords: corporate bond, risk factors, downside risk, credit risk, liquidity risk

JEL Classification: G10, G11, C13

Suggested Citation

Bai, Jennie and Bali, Turan G. and Wen, Quan, Common Risk Factors in the Cross-Section of Corporate Bond Returns (February 2018). Journal of Financial Economics, Forthcoming, HKUST Finance Symposium 2016: Active Investing and Arbitrage Capital, Available at SSRN: https://ssrn.com/abstract=2819910 or http://dx.doi.org/10.2139/ssrn.2819910

Jennie Bai

Georgetown University - McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

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

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Turan G. Bali (Contact Author)

Georgetown University - McDonough School of Business ( email )

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

HOME PAGE: https://sites.google.com/a/georgetown.edu/turan-bali

Quan Wen

McDonough School of Business, Georgetown University ( email )

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

HOME PAGE: http://quan-wen.facultysite.georgetown.edu/home

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