Does the Long-Run Risk Explain the Cross-Section of Corporate Bond Returns?

52 Pages Posted: 14 Oct 2020

See all articles by Redouane Elkamhi

Redouane Elkamhi

University of Toronto - Rotman School of Management

Chanik Jo

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Yoshio Nozawa

University of Toronto

Date Written: October 13, 2020

Abstract

We test whether long-run consumption risk can explain the cross-section of corporate bond risk premiums. We find that a one-factor model with long-run consumption growth explains the risk premiums on bond portfolios sorted on credit spreads, maturity, credit rating, downside risk, idiosyncratic volatility, and the betas with respect to shocks to financial intermediary's capital of He, Kelly, and Manela (2017). Furthermore, the estimated risk aversion coefficient declines as we increase the horizon to measure consumption growth, and a model with relatively low values of risk-aversion can match the observed risk premiums if we use 24-month growth rate as a risk factor.

Suggested Citation

Elkamhi, Redouane and Jo, Chanik and Nozawa, Yoshio, Does the Long-Run Risk Explain the Cross-Section of Corporate Bond Returns? (October 13, 2020). Proceedings of Paris December 2020 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3710531 or http://dx.doi.org/10.2139/ssrn.3710531

Redouane Elkamhi

University of Toronto - Rotman School of Management ( email )

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

Chanik Jo (Contact Author)

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

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

Yoshio Nozawa

University of Toronto ( email )

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

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