A One-Factor Model of Corporate Bond Premia

100 Pages Posted: 22 Sep 2020 Last revised: 26 Aug 2021

See all articles by Redouane Elkamhi

Redouane Elkamhi

University of Toronto - Rotman School of Management

Chanik Jo

CUHK Business School

Yoshio Nozawa

University of Toronto

Date Written: August 25, 2021

Abstract

A one-factor model based on long-run consumption growth explains the risk premiums on corporate bond portfolios sorted on credit rating, credit spreads, downside risk, idiosyncratic volatility, long-term reversals, maturity, and sensitivity to the financial intermediary capital factor. The estimated risk-aversion coefficient is lower when we use the consumption growth of wealthy households over a longer horizon as a risk factor, and a model with a 20-quarter horizon yields a risk-aversion coefficient of 15, a value similar to the one estimated from equity portfolios.

Keywords: Corporate Bond, Long-Run Consumption Risk, Cross-Section Test

JEL Classification: E44, E21, G12

Suggested Citation

Elkamhi, Redouane and Jo, Chanik and Nozawa, Yoshio, A One-Factor Model of Corporate Bond Premia (August 25, 2021). Available at SSRN: https://ssrn.com/abstract=3669068 or http://dx.doi.org/10.2139/ssrn.3669068

Redouane Elkamhi

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Chanik Jo (Contact Author)

CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

HOME PAGE: http://sites.google.com/view/chanik-jo/

Yoshio Nozawa

University of Toronto ( email )

105 St George St
Toronto, ON M5S3E6
Canada
3013125569 (Phone)

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