Working Paper: NBER ID: w25995
Authors: Jennie Bai; Turan G. Bali; Quan Wen
Abstract: We provide time-series and cross-sectional evidence on the significance of a risk-return tradeoff in the corporate bond market. We find a significantly positive intertemporal relation between expected return and risk in the bond market and the time-series predictability is driven by aggregate systematic risk instead of aggregate idiosyncratic risk. We also propose a new measure of systematic risk for corporate bonds and find a positive link between systematic risk and the cross-section of future bond returns. We provide an explanation for the significance of systematic (idiosyncratic) risk based on different investor preferences and informational frictions in the bond (equity) market.
Keywords: risk-return tradeoff; corporate bonds; systematic risk; idiosyncratic risk
JEL Codes: C13; G10; G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| idiosyncratic risk (D81) | future bond returns (G12) |
| lagged realized variance (C22) | future bond returns (G12) |
| systematic risk (G12) | future bond returns (G12) |