Equity Volatility and Corporate Bond Yields


  • John Y. Campbell,

  • Glen B. Taksler

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    • Campbell is with the Department of Economics, Harvard University, and NBER. Taksler is with Citigroup Global Markets. The views expressed are those of the author, not necessarily those of Citigroup Global Markets. The authors are grateful to Peter Hecht, Jeremy Stein, and an anonymous referee for helpful comments, and to Vardges Levonyan for able research assistance.


This paper explores the effect of equity volatility on corporate bond yields. Panel data for the late 1990s show that idiosyncratic firm-level volatility can explain as much cross-sectional variation in yields as can credit ratings. This finding, together with the upward trend in idiosyncratic equity volatility documented by Campbell, Lettau, Malkiel, and Xu (2001), helps to explain recent increases in corporate bond yields.