Is idiosyncratic tail risk priced in the cross-section of bond returns? –Evidence from Chinese bond markets

Wei-Qiang Huang, Jing Zhang and Peipei Liu

Applied Economics Letters, 2023, vol. 30, issue 10, 1318-1326

Abstract: This article investigates for the first time the role of idiosyncratic tail risk in the cross-sectional pricing of bond returns. We use the idiosyncratic return of the bond to measure the idiosyncratic tail risk based on the extreme value theory. The results show that bonds in the highest idiosyncratic tail risk quintile generate 3.5% more annual return compared to bonds in the lowest idiosyncratic tail risk quintile. In addition, we found that idiosyncratic tail risk is cross-sectionally positive correlated with bond expected returns in Chinese bond market, even when the downside risk, bond rating, liquidity, size, maturity, bond market beta, short-term reversals, and coupon rate are controlled. The positive correlation is in line with the traditional risk-return tradeoff theory. Because of their aversion to extreme losses, investors are willing to accept the low returns from low idiosyncratic tail risk bonds.

Date: 2023
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/13504851.2022.2053046 (text/html)
Access to full text is restricted to subscribers.

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:taf:apeclt:v:30:y:2023:i:10:p:1318-1326

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAEL20

DOI: 10.1080/13504851.2022.2053046

Access Statistics for this article

Applied Economics Letters is currently edited by Anita Phillips

More articles in Applied Economics Letters from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().