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

Journal of Financial Economics, Forthcoming

Georgetown McDonough School of Business Research Paper No. 3401231

73 Pages Posted: 21 Jun 2019 Last revised: 27 Apr 2021

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: October 14, 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 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

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 (October 14, 2020). Journal of Financial Economics, Forthcoming, 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

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