A One-Factor Model of Corporate Bond Premia

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: Suggested Citation

Elkamhi, Redouane and Jo, Chanik and Nozawa, Yoshio, A One-Factor Model of Corporate Bond Premia (November 26, 2022). Management Science, forthcoming, Available at SSRN: https://ssrn.com/abstract=3669068 or http://dx.doi.org/10.2139/ssrn.3669068