Is There a Risk-Return Tradeoff in the Corporate Bond Market? Time-Series and Cross-Sectional Evidence

Jennie Bai (), Turan G. Bali and Quan Wen

No 25995, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We provide time-series and cross-sectional evidence on the significance of a risk-return tradeoff in the corporate bond market. We find a significantly positive intertemporal relation between expected return and risk in the bond market and the time-series predictability is driven by aggregate systematic risk instead of aggregate idiosyncratic risk. We also propose a new measure of systematic risk for corporate bonds and find a positive link between systematic risk and the cross-section of future bond returns. We provide an explanation for the significance of systematic (idiosyncratic) risk based on different investor preferences and informational frictions in the bond (equity) market.

JEL-codes: C13 G10 G11 G12 (search for similar items in EconPapers)
Date: 2019-06
New Economics Papers: this item is included in nep-fmk and nep-rmg
Note: AP
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Published as Jennie Bai & Turan G. Bali & Quan Wen, 2021. "Is there a risk-return tradeoff in the corporate bond market? Time-series and cross-sectional evidence," Journal of Financial Economics, vol 142(3), pages 1017-1037.

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