Modeling Corporate Bond Returns

66 Pages Posted: 14 Dec 2020 Last revised: 27 Aug 2021

See all articles by Bryan T. Kelly

Bryan T. Kelly

Yale SOM; AQR Capital Management, LLC; National Bureau of Economic Research (NBER)

Diogo Palhares


Seth Pruitt

Arizona State University (ASU) - Finance Department

Date Written: December 1, 2020


We propose a conditional factor model for corporate bond returns with five factors and time-varying factor loadings. We have three main empirical findings. First, our factor model excels in describing the risks and returns of corporate bonds, improving over previously proposed models in the literature by a large margin. Second, our benchmark model recommends a systematic bond investment portfolio that significantly outperforms leading corporate credit investment strategies. Third, we find closer integration between debt and equity markets than found in prior literature.

Keywords: corporate bond, factor model, bond portfolio, credit risk, IPCA

JEL Classification: G10, G11, G12

Suggested Citation

Kelly, Bryan T. and Palhares, Diogo and Pruitt, Seth, Modeling Corporate Bond Returns (December 1, 2020). Available at SSRN: or

Bryan T. Kelly (Contact Author)

Yale SOM ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Diogo Palhares

Independent ( email )

Seth Pruitt

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

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