The cross-section of expected corporate bond returns: Betas or characteristics? |
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| Affiliation: | 1. School of Economics and Management, Leibniz University Hannover, Koenigsworther Platz 1, 30167 Hannover, Germany;2. ICMA Centre, Henley Business School, University of Reading, Reading, RG6 6BA, UK;1. Shanghai Advanced Institute of Finance (SAIF), Shanghai Jiaotong University, 211 West Huaihai Road, Shanghai 200030, China;2. College of Management and Economics, Tianjin University, 92 Weijin Road, Tianjin 300072，China;1. The Wharton School of Business, The University of Pennsylvania, Philadelphia, PA 190104, USA;2. The Eli Broad College of Business, Michigan State University, East Lansing, MI 48824, USA;3. Johnson College of Business, Cornell University, Ithaca, NY 14850, USA |
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| Abstract: | This paper finds that default betas are significantly related to the cross-section of average bond returns even after controlling for characteristics such as duration, ratings, and yield-to-maturity. Among characteristics, only yield-to-maturity is significantly related to average bond returns after controlling for default and term betas. The default and term factors are able to price the returns of beta-sorted portfolios better than they do the returns of yield-sorted portfolios. The magnitude of the ex ante Sharpe ratio generated by yield-sorted portfolios suggests non-risk-based explanations. Overall, given the elusive nature of systematic risk in empirical asset pricing, the central finding of our paper is that systematic risk matters for corporate bonds. |
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