In Search of Systematic Risk and the Idiosyncratic Volatility Puzzle in the Corporate Bond Market
61 Pages Posted: 21 Jun 2019 Last revised: 15 Jul 2019
Date Written: June 8, 2019
We propose a comprehensive measure of systematic risk for corporate bonds as a nonlinear function of robust risk factors and find a significantly positive link between systematic risk and the time-series and cross-section of future bond returns. We also find a positive but insignificant relation between idiosyncratic risk and future bond returns, suggesting that institutional investors dominating the bond market hold well-diversified portfolios with a negligible exposure to bond-specific risk. The composite measure of systematic risk also predicts the distribution of future market returns, and the systematic risk factor earns a positive price of risk, consistent with Merton's (1973) ICAPM.
Keywords: corporate bonds, systematic risk, idiosyncratic volatility, risk factors
JEL Classification: G10, G11, C13
Suggested Citation: Suggested Citation