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

63 Pages Posted: 26 Jun 2019 Last revised: 13 Jul 2023

See all articles by Jennie Bai

Jennie Bai

Georgetown University - McDonough School of Business; National Bureau of Economic Research (NBER)

Turan G. Bali

Georgetown University - McDonough School of Business

Quan Wen

McDonough School of Business, Georgetown University

Multiple version iconThere are 2 versions of this paper

Date Written: June 2019

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.

Suggested Citation

Bai, Jennie and Bali, Turan G. and Wen, Quan, Is There a Risk-Return Tradeoff in the Corporate Bond Market? Time-Series and Cross-Sectional Evidence (June 2019). NBER Working Paper No. w25995, Available at SSRN: https://ssrn.com/abstract=3408930

Jennie Bai (Contact Author)

Georgetown University - McDonough School of Business ( email )

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HOME PAGE: http://www.jenniebai.com

National Bureau of Economic Research (NBER) ( email )

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Turan G. Bali

Georgetown University - McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: https://sites.google.com/a/georgetown.edu/turan-bali

Quan Wen

McDonough School of Business, Georgetown University ( email )

37th and O Street, NW
Washington D.C., DC 20057
United States

HOME PAGE: http://quan-wen.facultysite.georgetown.edu/home

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