In Search of Systematic Risk and the Idiosyncratic Volatility Puzzle in the Corporate Bond Market
NBER Working Paper No. 25995
We propose a comprehensive measure of systematic risk for corporate bonds as a nonlinear function of robust risk factors and find a significantly positive link between systematic risk and the time-series and cross-section of future bond returns. We also find a positive but insignificant relation between idiosyncratic risk and future bond returns, suggesting that institutional investors dominating the bond market hold well-diversified portfolios with a negligible exposure to bond-specific risk. The composite measure of systematic risk also predicts the distribution of future market returns, and the systematic risk factor earns a positive price of risk, consistent with Merton's (1973) ICAPM.
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Document Object Identifier (DOI): 10.3386/w25995