Is There a Risk-Return Tradeoff in the Corporate Bond Market? Time-Series and Cross-Sectional Evidence

65 Pages Posted: 21 Jun 2019 Last revised: 9 Jun 2020

See all articles by Jennie Bai

Jennie Bai

Georgetown University - Department of Finance; National Bureau of Economic Research (NBER)

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Quan Wen

Georgetown University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: May 27, 2020

Abstract

We provide time-series and cross-sectional evidence on the significance of a risk-return tradeoff in the bond and equity markets. We find significantly positive intertemporal and cross-sectional relations between systematic risk and expected returns on corporate bonds, whereas there is no evidence of a significant link between idiosyncratic risk and future bond returns. We provide an explanation for the significance of systematic (idiosyncratic) risk based on different investor preferences and informational frictions in the bond (equity) market. We also show that the risk-return tradeoff in bonds (equities) is driven by the discount rate (cash flow) news component of bond (equity) returns.

Keywords: corporate bonds, systematic risk, idiosyncratic volatility, risk factors

JEL Classification: G10, G11, C13

Suggested Citation

Bai, Jennie and Bali, Turan G. and Wen, Quan, Is There a Risk-Return Tradeoff in the Corporate Bond Market? Time-Series and Cross-Sectional Evidence (May 27, 2020). Georgetown McDonough School of Business Research Paper No. 3401231, Available at SSRN: https://ssrn.com/abstract=3401231 or http://dx.doi.org/10.2139/ssrn.3401231

Jennie Bai

Georgetown University - Department of Finance ( email )

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Washington, DC 20057
United States

HOME PAGE: http://www.jenniebai.com

National Bureau of Economic Research (NBER) ( email )

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Turan G. Bali (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

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Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

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

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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