The co-pricing factor zoo

Alexander Dickerson, Christian Julliard and Philippe Mueller

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We analyze 18 quadrillion models for the joint pricing of corporate bond and stock returns. Strikingly, we find that equity and nontradable factors alone suffice to explain corporate bond risk premia once their Treasury term structure risk is accounted for, rendering the extensive bond factor literature largely redundant for this purpose. While only a handful of factors, behavioral and nontradable, are likely robust sources of priced risk, the true latent stochastic discount factor is dense in the space of observable factors. Consequently, a Bayesian Model Averaging Stochastic Discount Factor explains risk premia better than all low-dimensional models, in- and out-of-sample, by optimally aggregating dozens of factors that serve as noisy proxies for common underlying risks, yielding an out-of-sample Sharpe ratio of 1.5 to 1.8. This SDF, as well as its conditional mean and volatility, are persistent, track the business cycle and times of heightened economic uncertainty, and predict future asset returns.

Keywords: bond-stock co-pricing; corporate bonds; factor zoo; factor models; Bayesian methods; macro-finance; asset pricing (search for similar items in EconPapers)
JEL-codes: C12 C13 C52 G10 G12 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2026-08-31
References: Add references at CitEc
Citations:

Published in Journal of Financial Economics, 31, August, 2026, 182. ISSN: 0304-405X

Downloads: (external link)
https://researchonline.lse.ac.uk/id/eprint/138476/ Open access version. (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:138476

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().