Risk and Return in International Corporate Bond Markets

Abstract

Corporate bond returns in major developed economies increase with lower ratings and higher residual maturity. The performance of various factor models featuring corporate, sovereign and equity markets as factors suggests that the corporate bond factor plays a dominant role in explaining the variation of corporate bond returns. From a factor model perspective, local factors contribute substantially more than global factors. The factor exposures show intuitive patterns: as ratings worsen, corporate bond betas increase steeply, sovereign betas decline monotonically and equity betas show a hockey stick pattern. However, from a pricing perspective, we find little evidence against the global CAPM model.

Keywords: Corporate bond markets; CAPM; international market integration; asset class integration; bond ratings; risk; return; market efficiency tests; comovement.

JEL Classification: G10, G11, G15