What Drives Corporate Bond Market Betas?

Abhay Abhyankar and Angelica Gonzalez ()

ESE Discussion Papers from Edinburgh School of Economics, University of Edinburgh

Abstract: We study the cross-section of expected corporate bond returns using an intertemporal CAPM with three factors; innovations in future excess bond returns, future real interest rates and future expected inflation. Our test assets are a broad range of bond market index portfolios of different default categories. We find, using the Fama MacBeth cross-sectional method, that innovations in future expected real interest ratesand future expected inflation explain the cross-section of expected corporate bond returns. Our model provides an alternative to ad hoc risk factors used, for example, in evaluating the performance of bond mutual funds.

Keywords: bond market; fixed income mutual funds; asset pricing model; variance decomposition; recursive utility; betas; factor pricing. (search for similar items in EconPapers)
JEL-codes: F31 F37 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk, nep-rmg and nep-upt
Date: 2007-07-19
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Persistent link: http://EconPapers.repec.org/RePEc:edn:esedps:157

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