 Downside variance premium, firm fundamentals, and expected corporate bond returnsTao Huang, Liang Jiang and Junye Li Journal of Banking & Finance, 2023, vol. 154, issue C Abstract: We find a strong and robust positive relationship between individual downside variance premia (DVP)–the difference between risk-neutral and physical expected downside variances–and future corporate bond returns. The spread portfolio that longs the high DVP bond portfolio and shorts the low DVP bond portfolio earns a statistically significant excess return of 0.37% (0.42%) per month in value- (equal-)weighted returns. The alpha estimates from various factor models remain statistically significant and economically substantial. The predictive power of the downside variance premium is stronger in noninvestment-grade (long-maturity) corporate bonds than in investment-grade (short-maturity) bonds. We show that the downside variance premium positively relates to the likelihood of future default and cash flow uncertainty and negatively relates to future cash flows. Keywords: Corporate bond return predictability; Equity options; Downside variance premium; Probability of default; Credit rating downgrade; Cash flow uncertainty (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:154:y:2023:i:c:s0378426623001516 DOI: 10.1016/j.jbankfin.2023.106946 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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