Volatility and the Cross-Section of Corporate Bond Returns

45 Pages Posted: 28 Jun 2018 Last revised: 7 Nov 2018

See all articles by Kee H. Chung

Kee H. Chung

State University of New York at Buffalo - School of Management

Junbo Wang

Dept. of Economics and Finance, City Univ. of HK

Chunchi Wu

SUNY at Buffalo - School of Management

Date Written: November 5, 2018

Abstract

This paper examines the pricing of volatility risk and idiosyncratic volatility in the cross-section of corporate bond returns for the period of 1994-2016. Results show that bonds with high volatility betas have low expected returns and this negative relation appears in all segments of corporate bonds. Further, bonds with high idiosyncratic bond (stock) volatility have high (low) expected returns, and this relation strengthens as ratings decrease. Conventional risk factors and bond/issuer characteristics cannot account for these cross-sectional relations. There is evidence that the effect of idiosyncratic stock volatility on expected bond returns works through the channel of contemporaneous stock returns.

Keywords: Aggregate Volatility Risk; Corporate Bond Pricing; Default Risk; Idiosyncratic Risk; Ratings

JEL Classification: G12; G13

Suggested Citation

Chung, Kee H. and Wang, Junbo and Wu, Chunchi, Volatility and the Cross-Section of Corporate Bond Returns (November 5, 2018). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=3192559

Kee H. Chung

State University of New York at Buffalo - School of Management ( email )

Buffalo, NY 14260
United States
716-645-3262 (Phone)
716-645-3823 (Fax)

HOME PAGE: http://mgt.buffalo.edu/faculty/academic-departments/finance/faculty/kee-chung.html

Junbo Wang

Dept. of Economics and Finance, City Univ. of HK ( email )

83 Tat Chee Ave., Kowloon Tong
Kowloon Town
Kowloon, 220
Hong Kong
34429492 (Phone)
852-2788-8806 (Fax)

Chunchi Wu (Contact Author)

SUNY at Buffalo - School of Management ( email )

Jacobs Management Center
Buffalo, NY 14222
United States

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