The determinants of corporate bond yields |
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| Authors: | Sheen Liu Jian Shi Junbo Wang Chunchi Wu |
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| Institution: | 1. Faculty of Finance, Washington State University, 13216 NE Salmon Creek Ave., Vancouver, WA 98686, USA;2. College of Business Administration, University of Texas at Arlington, Arlington, TX 76019, USA;3. Faculty of Business, City University of Hong Kong, Kowloon, Hong Kong SAR;4. Lee Kong Chian School of Business, Singapore Management University, Singapore 178899, Singapore;5. College of Business, University of Missouri, Columbia, MO 65211, USA |
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| Abstract: | Previous studies have found that common factors explain a high proportion of corporate bond yields. In this paper, we test whether there is a systematic risk premium beyond that implied by a risk-neutral term structure model. We propose a reduced-form term structure model that incorporates both default and tax effects. After controlling the effects of personal taxes and default risk, empirical tests show that at least two of the Fama–French factors are important for corporate bond yields. Our results suggest that term structure models should incorporate aggregate common risk factors in order to better explain the dynamics of corporate bond yields. |
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