Common Factors in the Performance of European Corporate Bonds – Evidence before and after the Financial Crisis


  • We would like to thank the editor (John Doukas) and two anonymous referees for their helpful suggestions. We are grateful to Philip Kurmann, XiaoHua Chen, Bjarne Astrup Jensen, Pedro Barroso, and participants at the 2012 European Financial Management Association Symposium (Hamburg), the 2012 Portuguese Finance Network Conference (Aveiro), and the 2012 Financial Engineering and Banking Society Conference (London) for their comments. We also thank Thomson Reuters Austria GmbH for providing data. Correspondence: Ranko Jelic.


We examine monthly excess returns for 23 Euro-denominated corporate bond indices and propose a new specification for bond asset pricing models. Specifically, we separate level and slope components of term and default risk factors and examine liquidity risk. Our results suggest that level and slope risk factors, derived from complete interest rate and default spread term structures, significantly improve the explanatory power of the Fama and French (1993) 2-factor model. We also demonstrate different sensitivities of risk factors before and after recent financial crisis. The results are robust to calendar seasonality and the consideration of equity market returns.