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Predictions of corporate bond excess returns

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  • Lin, Hai
  • Wang, Junbo
  • Wu, Chunchi

Abstract

In this paper, we investigate the predictability of corporate bond excess returns using a comprehensive data sample for the period from January 1973 to December 2010. We find that corporate bond returns are more predictable than stock returns, and the predictability tends to be higher for low-grade bonds and short-maturity bonds. A forward rate factor captures substantial variations in expected bond excess returns. Furthermore, liquidity factors and a bond׳s credit spread have predictive power on corporate bond excess returns. Combining these variables with traditional predictors significantly improves the performance of the predictive model for corporate bond returns.

Suggested Citation

  • Lin, Hai & Wang, Junbo & Wu, Chunchi, 2014. "Predictions of corporate bond excess returns," Journal of Financial Markets, Elsevier, vol. 21(C), pages 123-152.
    • Handle: RePEc:eee:finmar:v:21:y:2014:i:c:p:123-152
    DOI: 10.1016/j.finmar.2014.08.003
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    More about this item

    Keywords

    Return predictability; Default premium; Term premium; Duration; Credit spreads; Liquidity;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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