IDEAS home Printed from https://ideas.repec.org/a/cup/jfinqa/v56y2021i5p1653-1678_5.html
   My bibliography  Save this article

The Macroeconomic Uncertainty Premium in the Corporate Bond Market

Author

Listed:
  • Bali, Turan G.
  • Subrahmanyam, Avanidhar
  • Wen, Quan

Abstract

We examine the role of macroeconomic uncertainty in the cross section of corporate bonds and find a significant uncertainty premium for both investment-grade (IG) (0.40% per month) and non-investment-grade (NIG) (0.81% per month) bonds. The economic-uncertainty premium declines as we progressively remove downgraded bonds, indicating that the premium represents an increase in required returns for bonds with higher credit and macroeconomic risk. The economic-uncertainty premia vary across equities and bonds in a manner consistent with the heterogeneous risk-aversion levels of dominant players in equities (retail investors) versus bonds (institutional investors).

Suggested Citation

  • Bali, Turan G. & Subrahmanyam, Avanidhar & Wen, Quan, 2021. "The Macroeconomic Uncertainty Premium in the Corporate Bond Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 56(5), pages 1653-1678, August.
    • Handle: RePEc:cup:jfinqa:v:56:y:2021:i:5:p:1653-1678_5
    as

    Download full text from publisher

    File URL: https://www.cambridge.org/core/product/identifier/S0022109020000538/type/journal_article
    File Function: link to article abstract page
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Daxuan Cheng & Yin Liao & Zheyao Pan, 2023. "The geopolitical risk premium in the commodity futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(8), pages 1069-1090, August.
    2. Dickerson, Alexander & Mueller, Philippe & Robotti, Cesare, 2023. "Priced risk in corporate bonds," Journal of Financial Economics, Elsevier, vol. 150(2).
    3. Marton Lotz & Daniel Ruf & Johannes Strobel, 2023. "Uncertainty premia in REIT returns," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 51(2), pages 372-407, March.
    4. Liu, Wei & Garrett, Ian, 2023. "Regime-dependent effects of macroeconomic uncertainty on realized volatility in the U.S. stock market," Economic Modelling, Elsevier, vol. 128(C).
    5. Alshammari, Saad & Andriosopoulos, Kostas & Kaabia, Olfa & Mohamed, Kamel Si & Urom, Christian, 2024. "The interplay among corporate bonds, geopolitical risks, equity market, and economic uncertainties," International Review of Financial Analysis, Elsevier, vol. 95(PA).
    6. Joost Bats & Giovanna Bua & Daniel Kapp, 2023. "Physical and transition risk premiums in euro area corporate bond markets," Working Papers 761, DNB.
    7. Bats, Joost Victor & Bua, Giovanna & Kapp, Daniel, 2024. "Physical and transition risk premiums in euro area corporate bond markets," Working Paper Series 2899, European Central Bank.
    8. Lee, Kiryoung, 2022. "Which uncertainty measures matter for the cross-section of corporate bond returns? Evidence from the U.S. during 1973–2020," Finance Research Letters, Elsevier, vol. 48(C).
    9. Treepongkaruna, Sirimon & Chan, Kam Fong & Malik, Ihtisham, 2023. "Climate policy uncertainty and the cross-section of stock returns," Finance Research Letters, Elsevier, vol. 55(PA).
    10. Simon Rudkin & Wanling Qiu & Pawel Dlotko, 2021. "Uncertainty, volatility and the persistence norms of financial time series," Papers 2110.00098, arXiv.org.
    11. Zhaobo Zhu & Licheng Sun & Jun Tu & Qiang Ji, 2022. "Oil price shocks and stock market anomalies," Post-Print hal-03712237, HAL.
    12. Zhang, Heming & Wang, Guanying, 2021. "Reversal effect and corporate bond pricing in China," Pacific-Basin Finance Journal, Elsevier, vol. 70(C).
    13. deHaan, Ed & Li, Jiacui & Watts, Edward M., 2023. "Retail bond investors and credit ratings," Journal of Accounting and Economics, Elsevier, vol. 76(1).
    14. Jochen Güntner & Benjamin Karner, 2023. "The bond agio premium," Economics working papers 2023-13, Department of Economics, Johannes Kepler University Linz, Austria.
    15. Zhang, Teng & Xu, Zhiwei & Li, Jiaqi, 2023. "The asset pricing implications of global oil price uncertainty: Evidence from the cross-section of Chinese stock returns," Energy, Elsevier, vol. 285(C).
    16. Usman, Adam, 2022. "Cash holdings and real asset liquidity," International Review of Financial Analysis, Elsevier, vol. 83(C).
    17. Dirk Broeders & Marleen de Jonge & David Rijsbergen, 2024. "The European Carbon Bond Premium," Working Papers 798, DNB.
    18. Andrade, Sandro C. & Ekponon, Adelphe & Jeanneret, Alexandre, 2023. "Sovereign risk premia and global macroeconomic conditions," Journal of Financial Economics, Elsevier, vol. 147(1), pages 172-197.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cup:jfinqa:v:56:y:2021:i:5:p:1653-1678_5. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Kirk Stebbing (email available below). General contact details of provider: https://www.cambridge.org/jfq .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.