Priced Risk in Corporate Bonds

with Alex Dickerson and Philippe Mueller, 2023, working paper.

[pdf] Recent studies document strong empirical support for factor models that aim at explaining the
cross-sectional variation in corporate bond returns. We revisit these results and provide evidence
that common factor pricing in corporate bonds is exceedingly difficult to establish. Based on
returns in excess of the one-month Treasury bill rate, we demonstrate that previously proposed
corporate bond risk factors do not provide any incremental pricing information to the corporate
bond market factor. In addition, when considering duration-adjusted corporate bond returns,
the market factors in the equity and bond CAPM display nontrivial pricing ability for several
cross-sections of corporate bond returns. Finally, pricing industry sorted corporate bond portfolios
appears to be quite demanding for all of the considered factor models. Our results challenge the
status quo with respect to priced risk in the cross-section of corporate bond returns.