 High-yield versus investment-grade bonds: less risk and greater returns?Hsi Li, Joseph McCarthy and Coleen Pantalone Applied Financial Economics, 2014, vol. 24, issue 20, 1303-1312 Abstract: Using Bank of America/Merrill Lynch bond yield indexes, we compare the returns on investment-grade bonds to the returns on high-yield bonds over the period from January 1997 through mid-August 2011, a period marked by the collapse of the technology sector in early 2000 and the financial crisis in 2008. We compare return and risk measures under the assumption of a normal distribution with those obtained under the assumption of a stable distribution. When a normal distribution is assumed, we see a higher expected return associated with a lower SD on the high-yield bond returns relative to investment-grade bond returns. However, we also find that the returns on both high-yield bonds and investment-grade bonds exhibit stable (fat-tailed) distributions, with the fat tail more pronounced for the high-yield bond series. These results suggest that the assumption of a distribution that allows for fat tails and skewness is important for identifying the risk and return characteristics of these bond series. Date: 2014 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:taf:apfiec:v:24:y:2014:i:20:p:1303-1312 Ordering information: This journal article can be ordered from DOI: 10.1080/09603107.2014.925049 Access Statistics for this article Applied Financial Economics is currently edited by Anita Phillips More articles in Applied Financial Economics from Taylor & Francis Journals |
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