Abstract
This paper finds that default betas are significantly related to the cross-section of average bond returns even after controlling for characteristics such as duration, ratings, and yield-to-maturity. Among characteristics, only yield-to-maturity is significantly related to average bond returns after controlling for default and term betas. The default and term factors are able to price the returns of beta-sorted portfolios better than they do the returns of yield-sorted portfolios. The magnitude of the ex ante Sharpe ratio generated by yield-sorted portfolios suggests non-risk-based explanations. Overall, given the elusive nature of systematic risk in empirical asset pricing, the central finding of our paper is that systematic risk matters for corporate bonds.
Original language | English |
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Journal | Journal of Financial Economics |
Volume | 75 |
Issue number | 1 |
Pages (from-to) | 85-114 |
Number of pages | 30 |
ISSN | 0304-405X |
DOIs | |
Publication status | Published - 2005 |
Externally published | Yes |
Keywords
- Asset pricing
- Betas
- Characteristics
- Corporate bond returns
- Yields