Common risk factors in the cross-section of corporate bond returns

By Jennie Bai, Turan G. Bali, Quan Wen. Journal of Financial Economics, 2019

247 citations recorded by the source corpus.

We investigate the cross-sectional determinants of corporate bond returns and find that downside risk is the strongest predictor of future bond returns. We also introduce common risk factors based on the prevalent risk characteristics of corporate bonds—downside risk, credit risk, and liquidity risk—and find that these novel bond factors have economically and statistically significant risk premiums that cannot be explained by long-established stock and bond market factors. We show that the newly proposed risk factors outperform all other models considered in the literature in explaining the returns of the industry- and size/maturity-sorted portfolios of corporate bonds.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/7dad8ce4d1119777c26aae61097acca4ab0ff46a

Citations in the corpus

• Climate Regulatory Risks and Corporate Bonds (2020, unknown): “Further, climate and environmental risks are fundamentally downside risks for most firms and Bai, Bali, and Wen (2019) show that, in the cross-section, downside risk is the strongest predictor of future bond returns.”
• Climate Change News Risk and Corporate Bond Returns (2020, unknown): “To elaborate on the economic significance of our results, we compare the effect of βCCN to that of DOWNSIDE_RISK, which Bai et al. (2019) show to be a strong predictor of future corporate bond returns.”