Inflation Volatility Risk and the Cross-section of Corporate Bond Returns

Abstract

I examine the relevance of inflation volatility risk ---uncertainty on the unexpected component of inflation--- in the cross-section of expected corporate bond returns. I document a negative and significant inflation volatility risk premium (IVRP) obtained from the difference between high and low-inflation beta portfolios after accounting for common risk factors in the equity and corporate bond markets. Further, I find that the IVRP is partially explained by market risk and alternative measures of monetary policy shocks. Lastly, I show that the IVRP is associated with firms that incur in debt maturity management to mitigate refinancing risks.

Keywords: Inflation volatility risk, corporate bond returns, bond risk factors.

JEL Classification: G10, G11, G12