Benchmarking Individual Corporate Bonds

64 Pages Posted: 12 Oct 2021 Last revised: 24 Jun 2022

See all articles by Xin He

Xin He

Hunan University - College of Finance and Statistics; City University of Hong Kong (CityU)

Guanhao Feng

City University of Hong Kong (CityU)

Junbo Wang

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

Chunchi Wu

SUNY at Buffalo - School of Management

Date Written: June 20, 2022

Abstract

We propose a new econometric model, benchmark combination model (BCM), to estimate and decompose asset risk premia in empirical asset pricing. BCM pricing kernel is a weighted combination of the basis portfolios sorted on many asset characteristics. With a no-arbitrage objective, our approach minimizes cross-sectional pricing errors and identifies the sources of risk premia. With a 45-year sample of U.S. corporate bonds, we find that BCM outperforms prevailing factor models in pricing corporate bonds. Second, we find credit ratings, maturity, short-term reversal, momentum, and variance are primary sources of bond risk premia. Finally, incorporating machine learning forecasts into BCM shows strong evidence of return predictability.

Keywords: Characteristic-based benchmark, high-dimensional sort, corporate bond risk premia, forecast combination, machine learning, return predictability.

JEL Classification: C1, G1

Suggested Citation

He, Xin and Feng, Guanhao and Wang, Junbo and Wu, Chunchi, Benchmarking Individual Corporate Bonds (June 20, 2022). Available at SSRN: https://ssrn.com/abstract=3940817 or http://dx.doi.org/10.2139/ssrn.3940817

Xin He (Contact Author)

Hunan University - College of Finance and Statistics ( email )

109th Shijiachong Road, Yuelu District
Changsha, Hunan 410006
China

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

City University of Hong Kong (CityU) ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Guanhao Feng

City University of Hong Kong (CityU) ( email )

83 Tat Chee Avenue
Kowloon Tong
Hong Kong

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

SUNY at Buffalo - School of Management ( email )

Jacobs Management Center
Buffalo, NY 14222
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
192
Abstract Views
669
rank
228,705
PlumX Metrics