NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Quan Wen

3700 O St. N.W., Washington DC, 20057
Washington D.C., DC 20057
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Tel: 2026876530

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Institutional Affiliation: Georgetown University

NBER Working Papers and Publications

June 2019In 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.
 
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