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The Riskiness of Corporate Bonds



  • Any views expressed in this article are the author's and do not necessarily represent those of the Bank of Italy. I wish to thank the editor Kenneth West, two anonymous referees, Paolo Angelini, Emanuela Ciapanna, Giuseppe Grande, Giovanni Guazzarotti, Aviram Levy, Juri Marcucci, Giulio Nicoletti, Fabio Panetta, Marcello Pericoli, as well as seminar participants at the Bank of Italy, at the Bank of Spain, and at the XI Quantitative Finance Workshop (Palermo 2010) for providing comments on previous versions of the paper.


We use an index of riskiness recently proposed by Aumann and Serrano (2008) to analyze how the riskiness of diversified portfolios of corporate bonds changes across rating classes and through time and how it compares to the riskiness of other financial instruments. We find that differences in riskiness among portfolios of bonds belonging to different rating classes are seldom statistically significant. We instead find significant time variation in riskiness, driven mainly by return volatility, inflation, and average bond yields. In particular, we find that increases in average bond yields have historically tended to reduce the riskiness of portfolios of corporate bonds by increasing their expected return and by lowering the probability of portfolio losses.