In Search of the Idiosyncratic Volatility Puzzle in the Corporate Bond Market

55 Pages Posted: 21 Jun 2019 Last revised: 2 Dec 2019

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: June 8, 2019

Abstract

We propose a novel measure of idiosyncratic risk for corporate bonds and find an insignificant relation between idiosyncratic risk and the cross-section of future bond returns, suggesting that institutional investors dominating the bond market hold well-diversified portfolios with a negligible exposure to bond-specific risk. We show that common idiosyncratic volatility (CIV) is priced in the cross-section of both equities and bonds. While the CIV premium remains significantly negative in the equity market after controlling for the long-established risk factors, it is explained in the bond market by the downside, credit, and liquidity risk factors of corporate bonds.

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, In Search of the Idiosyncratic Volatility Puzzle in the Corporate Bond Market (June 8, 2019). 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 )

3700 O Street, NW
Washington, DC 20057
United States

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

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Turan G. Bali (Contact Author)

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

3700 O Street, NW
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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
106
Abstract Views
588
rank
250,767
PlumX Metrics