In Search of the Idiosyncratic Volatility Puzzle in the Corporate Bond Market
55 Pages Posted: 21 Jun 2019 Last revised: 2 Dec 2019
Date Written: June 8, 2019
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: Suggested Citation