Priced Risk in Corporate Bonds

62 Pages Posted: 11 Apr 2023 Last revised: 15 Jun 2023

See all articles by Alexander Dickerson

Alexander Dickerson

UNSW Business School

Philippe Mueller

Warwick Business School Finance Group

Cesare Robotti

Warwick Business School

Date Written: March 23, 2023

Abstract

Recent studies document strong empirical support for multifactor models that aim to explain the cross-sectional variation in corporate bond expected excess returns. We revisit these findings and provide evidence that common factor pricing in corporate bonds is exceedingly difficult to establish. Based on portfolio- and bond-level analyses, we demonstrate that previously proposed bond risk factors, with traded liquidity as the only marginal exception, do not have any incremental explanatory power over the corporate bond market factor. Consequently, this implies that the bond CAPM is not dominated by either traded- or nontraded-factor models in pairwise and multiple model comparison tests.

Keywords: Corporate bond asset pricing, Bond factor model, Sharpe ratio, Efficient frontier, Model misspecification and identification

JEL Classification: C12, C13, G12

Suggested Citation

Dickerson, Alexander and Mueller, Philippe and Robotti, Cesare, Priced Risk in Corporate Bonds (March 23, 2023). Available at SSRN: https://ssrn.com/abstract=4398449 or http://dx.doi.org/10.2139/ssrn.4398449

Alexander Dickerson (Contact Author)

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Philippe Mueller

Warwick Business School Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

Cesare Robotti

Warwick Business School ( email )

West Midlands, CV4 7AL
United Kingdom

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