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A One-Factor Model of Corporate Bond Premia

Author

Listed:
  • Redouane Elkamhi

    (Rotman School of Management, University of Toronto, Toronto, Ontario M5S 1A1, Canada)

  • Chanik Jo

    (Chinese University of Hong Kong Business School, The Chinese University of Hong Kong, Hong Kong)

  • Yoshio Nozawa

    (Rotman School of Management, University of Toronto, Toronto, Ontario M5S 1A1, Canada)

Abstract

A one-factor model based on long-run consumption growth explains the risk premiums on corporate bond portfolios sorted on credit rating, credit spreads, downside risk, idiosyncratic volatility, long-term reversals, maturity, and sensitivity to the financial intermediary capital factor. The estimated risk-aversion coefficient is lower when we use the consumption growth of wealthy households over a longer horizon as a risk factor, and a model with a 20-quarter horizon yields a risk-aversion coefficient of 15, a value similar to the one estimated from equity portfolios.

Suggested Citation

  • Redouane Elkamhi & Chanik Jo & Yoshio Nozawa, 2024. "A One-Factor Model of Corporate Bond Premia," Management Science, INFORMS, vol. 70(3), pages 1875-1900, March.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:3:p:1875-1900
    DOI: 10.1287/mnsc.2023.4784
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