The Cross-Section of Credit Risk Premia and Expected Corporate Bond Returns

63 Pages Posted: 18 Feb 2021 Last revised: 20 Apr 2021

See all articles by Junbo Wang

Junbo Wang

Dept. of Economics and Finance, City Univ. of HK

Chunchi Wu

State University of New York at Buffalo

Zhenling Zhao

City University of Hong Kong (CityUHK) - Department of Economics and Finance

Date Written: February 6, 2021

Abstract

Using implied-CDS risk premium measures, we find that these variables have higher explanatory power for cross-sectional bond returns than the traditional default spread and ratings. The positive effect of the credit risk premium (CRP) factor on expected returns is pervasive, stronger for lower-rated bonds and robust to controlling for conventional risk factors and bond characteristics. Besides the systematic CRP factor, idiosyncratic credit risk is also priced. The results show that the CRP beta effect in the cross-section of bond returns is largely a pure bond effect, which is not driven by the underlying structural model relationship between debt and equity.

Keywords: Credit risk premium, CDS spreads, expected bond returns, bond characteristics

JEL Classification: G12, G13

Suggested Citation

Wang, Junbo and Wu, Chunchi and Zhao, Zhenling, The Cross-Section of Credit Risk Premia and Expected Corporate Bond Returns (February 6, 2021). Available at SSRN: https://ssrn.com/abstract=3780412 or http://dx.doi.org/10.2139/ssrn.3780412

Junbo Wang

Dept. of Economics and Finance, City Univ. of HK ( email )

83 Tat Chee Ave., Kowloon Tong
Kowloon Town
Kowloon, 220
Hong Kong
34429492 (Phone)
852-2788-8806 (Fax)

Chunchi Wu

State University of New York at Buffalo ( email )

L Street
Buffalo, NY, NY 14260

Zhenling Zhao (Contact Author)

City University of Hong Kong (CityUHK) - Department of Economics and Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

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