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
Date Written: May 27, 2020
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: Suggested Citation