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

62 Pages Posted: 9 Aug 2021 Last revised: 27 Nov 2023

Date Written: July 12, 2021

Abstract

This paper examines the pricing 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 exists at the bond and firm level and it has a persistent impact on the market. Lastly, I show that the IVRP is partially explained by market risk and alternative measures of monetary policy shocks.

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

JEL Classification: G10, G11, G12

Suggested Citation

Ceballos, Luis, Inflation Volatility Risk and the Cross-section of Corporate Bond Returns (July 12, 2021). Available at SSRN: https://ssrn.com/abstract=3883556 or http://dx.doi.org/10.2139/ssrn.3883556

Luis Ceballos (Contact Author)

University of San Diego ( email )

5998 Alcala Park
San Diego, CA 92110-2492
United States

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

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