A One-Factor Model of Corporate Bond Premia

Redouane Elkamhi (), Chanik Jo () and Yoshio Nozawa ()
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Redouane Elkamhi: Rotman School of Management, University of Toronto, Toronto, Ontario M5S 1A1, Canada
Chanik Jo: Chinese University of Hong Kong Business School, The Chinese University of Hong Kong, Hong Kong
Yoshio Nozawa: Rotman School of Management, University of Toronto, Toronto, Ontario M5S 1A1, Canada

Management Science, 2024, vol. 70, issue 3, 1875-1900

Abstract: A one-factor model based on long-run consumption growth explains the risk premiums on corporate bond portfolios sorted on credit rating, credit spreads, downside risk, idiosyncratic volatility, long-term reversals, maturity, and sensitivity to the financial intermediary capital factor. The estimated risk-aversion coefficient is lower when we use the consumption growth of wealthy households over a longer horizon as a risk factor, and a model with a 20-quarter horizon yields a risk-aversion coefficient of 15, a value similar to the one estimated from equity portfolios.

Keywords: corporate bond; long-run consumption risk; cross-sectional test (search for similar items in EconPapers)
Date: 2024
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