Comoment Risk in Corporate Bond Yields and Returns

40 Pages Posted: 10 Oct 2017  

Pascal Francois

HEC Montreal - Department of Finance

Stephanie Heck

HEC-Management School of the University of Liège

Georges Hubner

HEC Management School - University of Liège; Maastricht University - Department of Finance; Gambit Financial Solutions

Thomas Lejeune

National Bank of Belgium

Date Written: October 7, 2017

Abstract

This paper provides a comoment factor analysis of corporate bond returns using sector index bond portfolios. Corporate bond excess default return are decomposed into systematic default risk premiums rewarding investors for exposure to default risk and net excess returns adjusting for actual market conditions. Higher order comoments contribute positively to systematic default risk premiums. Furthermore, covariance and cokurtosis lower net excess returns as they trigger more value losses. We show a gradual substitution effect between covariation and tail risk contributions to the systematic risk premium for higher maturities, indicating a shift from the pricing of downgrading to outright default risk.

Keywords: Credit risk, Bond returns, Comoment risk

Suggested Citation

Francois, Pascal and Heck, Stephanie and Hubner, Georges and Lejeune, Thomas, Comoment Risk in Corporate Bond Yields and Returns (October 7, 2017). Available at SSRN: https://ssrn.com/abstract=3050013 or http://dx.doi.org/10.2139/ssrn.3050013

Pascal Francois (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-7743 (Phone)
514-340-5632 (Fax)

Stephanie Heck

HEC-Management School of the University of Liège ( email )

Rue Louvrex 14
Liege, 4000

Georges Hubner

HEC Management School - University of Liège ( email )

Rue Louvrex 14, Bldg. N1
Liege, 4000
Belgium
+32 42327428 (Phone)

Maastricht University - Department of Finance ( email )

Maastricht, 6200 MD
Netherlands

Gambit Financial Solutions ( email )

Rue Forgeur 17
Liège, 4000
Belgium

Thomas Lejeune

National Bank of Belgium ( email )

Brussels, B-1000
Belgium

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