Downside Risk and the Cross-section of Corporate Bond Returns

29 Pages Posted: 27 Oct 2020

See all articles by Patrick Augustin

Patrick Augustin

McGill University

Linxiao Francis Cong

McGill University - Desautels Faculty of Management

Ricardo Lopez Aliouchkin

Syracuse University - Whitman School of Management

Roméo Tédongap

ESSEC Business School

Date Written: October 13, 2020

Abstract

We rationalize in a theoretical framework the empirically documented importance of volatility and downside risk in the cross-section of corporate bond returns. Our framework features time-varying macroeconomic uncertainty and generalized disappointment aversion. The model yields three downside risk factors versus one documented in the empirical literature. We find that our factors are able to explain the cross-sectional variation of corporate bond returns both at the individual bond- and portfolio-level. Our factors provide significant explanatory power beyond other established factors in the literature. Moreover, we find that volatility downside risk matters, while pure volatility risk is marginally significant. Last, we show that our three downside risk factors subsume the documented predictability of the Bai, Bali, and Wen (2019) downside risk factor.

Suggested Citation

Augustin, Patrick and Cong, Linxiao and Lopez Aliouchkin, Ricardo and Tédongap, Roméo, Downside Risk and 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=3710533 or http://dx.doi.org/10.2139/ssrn.3710533

Patrick Augustin

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

HOME PAGE: http://https://patrickaugustin.ca/

Linxiao Cong

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Ricardo Lopez Aliouchkin (Contact Author)

Syracuse University - Whitman School of Management ( email )

721 University Ave
Syracuse, NY NY 13244
United States
+13154433672 (Phone)

HOME PAGE: http://www.ricardolopezaliouchkin.com/

Roméo Tédongap

ESSEC Business School ( email )

Avenue Bernard Hirsch
BP 105 Cergy Cedex, 95021
France
+33134439734 (Phone)
+33134439734 (Fax)

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