The Macroeconomic Uncertainty Premium in the Corporate Bond Market
Journal of Financial and Quantitative Analysis, Forthcoming
54 Pages Posted: 1 Jun 2017
Date Written: February 1, 2020
We examine the role of macroeconomic uncertainty in the cross-section of corporate bonds and find a significant uncertainty premium for both investment-grade (0.40% per month) and non-investment-grade (0.81% per month) bonds. The economic uncertainty premium declines as we progressively remove downgraded bonds, indicating that the premium represents an increase in required returns for bonds with higher credit and macroeconomic risk. The economic uncertainty premia vary across equities and bonds in a manner consistent with heterogeneous risk aversion levels of dominant players in equities (retail investors) versus bonds (institutional investors).
Keywords: Economic uncertainty, risk premia, corporate bond returns
JEL Classification: G10, G11, C13
Suggested Citation: Suggested Citation