Prices and Volatilities in the Corporate Bond Market

Jack Bao, Jia Chen, Kewei Hou and Lei Lu
Additional contact information
Jack Bao: Federal Reserve Board
Jia Chen: Peking University
Kewei Hou: OH State University
Lei Lu: Peking University

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: We document a strong positive cross-sectional relation between corporate bond yield spreads and bond return volatilities. As corporate bond prices are generally attributable to both credit risk and illiquidity as discussed in Huang and Huang (2012), we apply a decomposition methodology to quantify the relative contributions of credit and illiquidity. Overall, our credit and illiquidity proxies can explain almost three quarters of the yield spread-bond volatility relation with credit and illiquidity contributing in a 70:30 ratio. Furthermore, we find that the credit portion of the yield spread-bond volatility relation is important even after controlling for equity volatility. The relation between yield spreads and volatilities is robust to different sample periods, including the financial crisis. We also find the ratio to be smaller for the investment-grade sub-sample, consistent with credit risk being relatively more important for understanding the yield spread-volatility relation in speculative-grade bonds.

JEL-codes: G11 G12 G13 (search for similar items in EconPapers)
Date: 2015-08
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2015-18

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