Duration-Based Valuation of Corporate Bonds

73 Pages Posted: 1 Sep 2021 Last revised: 12 Oct 2023

See all articles by Jules H. van Binsbergen

Jules H. van Binsbergen

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Yoshio Nozawa

University of Toronto

Michael Schwert

AQR Arbitrage, LLC

Date Written: October 10, 2023

Abstract

We decompose corporate bond and equity index returns into duration-matched government bond returns and the excess returns over this duration-matched counterfactual, which we term duration-adjusted returns. Our decomposition leads to markedly different return patterns and asset pricing implications compared to previously used excess return definitions (i.e., returns in excess of Treasury bills). In particular, we find that investment-grade bonds earn a small credit risk premium, comparable in magnitude to the convenience yield, and that duration adjustment resolves the CAPM's failure to price corporate bonds. These findings highlight the importance of adjusting for non-stationary interest rate environments in asset pricing tests.

Keywords: corporate bonds, duration, capital asset pricing model

JEL Classification: G12

Suggested Citation

van Binsbergen, Jules H. and Nozawa, Yoshio and Schwert, Michael, Duration-Based Valuation of Corporate Bonds (October 10, 2023). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper , Available at SSRN: https://ssrn.com/abstract=3914422 or http://dx.doi.org/10.2139/ssrn.3914422

Jules H. Van Binsbergen

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org/people/jules_vanbinsbergen

Yoshio Nozawa (Contact Author)

University of Toronto ( email )

105 St George St
Toronto, ON M5S3E6
Canada
3013125569 (Phone)

Michael Schwert

AQR Arbitrage, LLC ( email )

Two Greenwich Plaza
Greenwich, CT 06830
United States
2037423005 (Phone)

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