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Is There a Risk-Return Tradeoff in the Corporate Bond Market? Time-Series and Cross-Sectional Evidence

Jennie Bai, Turan G. Bali, Quan Wen

NBER Working Paper No. 25995
Issued in June 2019, Revised in May 2020
NBER Program(s):Asset Pricing

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.

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Document Object Identifier (DOI): 10.3386/w25995

 
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