Risk and Return in International Corporate Bond Markets
173 Pages Posted: 11 Aug 2020
Date Written: August, 2020
Corporate bond returns in the major developed economies increase with risk, as measured by maturity and ratings. From a pricing perspective, we find little to no evidence against the World CAPM model, where the market consists out of equity, sovereign and corporate bonds. However, from a factor model perspective, local factors contribute substantially more to the variation of corporate bond returns than global factors. The factor exposures show intuitive patterns: as ratings worsen, equity betas show a hockey stick pattern, sovereign betas decline monotonically and corporate bond betas increase steeply.
Keywords: asset class integration, bond ratings, CAPM, corporate bond markets, international market integration, return, risk
JEL Classification: G10, G11, G15
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