Is There a Risk-Return Tradeoff in the Corporate Bond Market? Time-Series and Cross-Sectional Evidence
Journal of Financial Economics, Forthcoming
73 Pages Posted: 21 Jun 2019 Last revised: 27 Apr 2021
Date Written: October 14, 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 a significantly positive intertemporal relation between expected return and risk in the bond market. We also propose novel measures of systematic and idiosyncratic risk for individual corporate bonds and find a significantly positive cross-sectional relation between systematic risk and expected bond returns, whereas there is no 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.
Keywords: corporate bonds, systematic risk, idiosyncratic volatility, risk-return tradeoff.
JEL Classification: C13, G10, G11
Suggested Citation: Suggested Citation