3700 O St. N.W., Washington DC, 20057
Washington D.C., DC 20057
Institutional Affiliation: Georgetown University
NBER Working Papers and Publications
|June 2019||In Search of Systematic Risk and the Idiosyncratic Volatility Puzzle in the Corporate Bond Market|
with Jennie Bai, Turan G. Bali: w25995
We propose a comprehensive measure of systematic risk for corporate bonds as a nonlinear function of robust risk factors and find a significantly positive link between systematic risk and the time-series and cross-section of future bond returns. We also find a positive but insignificant relation between idiosyncratic risk and future bond returns, suggesting that institutional investors dominating the bond market hold well-diversified portfolios with a negligible exposure to bond-specific risk. The composite measure of systematic risk also predicts the distribution of future market returns, and the systematic risk factor earns a positive price of risk, consistent with Merton's (1973) ICAPM.