The Macroeconomic Uncertainty Premium in the Corporate Bond Market

Journal of Financial and Quantitative Analysis, Forthcoming

54 Pages Posted: 1 Jun 2017

See all articles by Turan G. Bali

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

Quan Wen

Georgetown University - Department of Finance

Date Written: February 1, 2020

Abstract

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

Bali, Turan G. and Subrahmanyam, Avanidhar and Wen, Quan, The Macroeconomic Uncertainty Premium in the Corporate Bond Market (February 1, 2020). Journal of Financial and Quantitative Analysis, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2978191 or http://dx.doi.org/10.2139/ssrn.2978191

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

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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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