A One-Factor Model of Corporate Bond Premia
100 Pages Posted: 22 Sep 2020 Last revised: 26 Aug 2021
Date Written: August 25, 2021
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