The Corporate Bond Factor Zoo

79 Pages Posted: 12 Oct 2023 Last revised: 14 Nov 2023

See all articles by Alexander Dickerson

Alexander Dickerson

UNSW Business School

Christian Julliard

London School of Economics & Political Science (LSE) - Department of Finance; Centre for Economic Policy Research (CEPR)

Philippe Mueller

Warwick Business School Finance Group

Date Written: October 2, 2023

Abstract

Analyzing 563 trillion possible models, we find that the majority of tradable factors designed to price bond markets are unlikely sources of priced risk, and only one novel tradable bond factor, capturing the bond post-earnings announcement drift, should be included in the stochastic discount factor (SDF) with very high probability. Nevertheless, the SDF is dense in the space of observable factors, with both nontradable and equity-based ones being salient for pricing corporate bonds, and a Bayesian model averaging–SDF explains corporate risk premia better than all existing models, both in- and out-of-sample, and captures business cycle and market crash risks.

Keywords: Corporate bonds; Factor zoo; Asset pricing; Factor models; Bayesian methods.

JEL Classification: G12, C12, C13, C52, C53

Suggested Citation

Dickerson, Alexander and Julliard, Christian and Mueller, Philippe, The Corporate Bond Factor Zoo (October 2, 2023). UNSW Business School Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=4589786 or http://dx.doi.org/10.2139/ssrn.4589786

Alexander Dickerson (Contact Author)

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Christian Julliard

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Philippe Mueller

Warwick Business School Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

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