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Corporate Bond Returns and Volatility

Authors


  • We would like to thank Madhu Kalimpalli, Bong-Soo Lee, Hei-Wai Lee, Latha Ramchand, Sorin Sorescu, Arthur Warga, and seminar participants at the 2004 annual meetings of the Financial Management Association (New Orleans) and the 2004 Midwestern Finance Association (Chicago), especially Praveen Kumar, Cynthia J. Campbell (the editor), and two anonymous referees for helpful comments or discussions on issues discussed in this paper. All remaining shortcomings are our own responsibility.

* Corresponding author: Department of Finance, College of Business Administration, Florida International University, Miami, FL 33199; Phone: (305) 348-2680; Fax: (305) 348-4245; E-mail: jiangx@fiu.edu

Abstract

Recent literature emphasizes the relation of stock volatility to corporate bond yields. We demonstrate that during 1996–2005 corporate bond excess return volatility is directly related to contemporaneous corporate bond excess returns. In fact, the decompositions of aggregate bond volatility have a higher contemporaneous correlation with bond yields in comparison to idiosyncratic stock risk. Additionally, bond volatility and idiosyncratic risk are significant predictors of corporate three-month and six-month ahead bond excess returns. We also find that corporate bond volatility contains both slow moving and time-varying components.

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