Does Stock Return's Idiosyncratic Volatility Still Predict Corporate Bond Returns?

60 Pages Posted: 6 May 2018

See all articles by Sharif Mazumder

Sharif Mazumder

Oklahoma State University - Stillwater - Spears School of Business

Ali Nejadmalayeri

University of Wyoming - College of Business

Date Written: April 20, 2018

Abstract

In contrast to earlier decades, since the early 2000s, the average idiosyncratic volatility of stocks has fallen back to its pre-1990s level. Here, we examine whether decreasing volatility still helps to explain the cross-sectional variation of bond returns. Using a panel data of corporate bond returns spanning July 2002 to June 2016, we find that the average bond returns and lag idiosyncratic volatility are positively associated. The average returns on bonds with high sensitivities to average idiosyncratic volatilities exceed bonds with low sensitivities by about 2.4% for financial firms and 1.5% for nonfinancial firms. The positive association is robust when we control for size, bond ratings, leverage ratio, and bond maturity as well as the effects of default spread, term spread, and liquidity spread. The results suggest that idiosyncratic volatility is still an important factor in explaining the cross-sectional variation of average bond returns.

Keywords: Idiosyncratic Volatility, Bond Returns

JEL Classification: G12

Suggested Citation

Mazumder, Sharif and Nejadmalayeri, Ali, Does Stock Return's Idiosyncratic Volatility Still Predict Corporate Bond Returns? (April 20, 2018). Available at SSRN: https://ssrn.com/abstract=3166334 or http://dx.doi.org/10.2139/ssrn.3166334

Sharif Mazumder (Contact Author)

Oklahoma State University - Stillwater - Spears School of Business ( email )

201 Business
Stillwater, OK 74078-0555
United States

Ali Nejadmalayeri

University of Wyoming - College of Business ( email )

1000 E. University Avenue
Laramie, WY 82071
United States

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