The Macroeconomic Uncertainty Premium in the Corporate Bond Market

We examine the role of macroeconomic uncertainty in the cross section of corporate bonds and find a significant uncertainty premium for both investment-grade (IG) (0.40% per month) and non-investment-grade (NIG) (0.81% per month) bonds. The economic-uncertainty premium declines as we progressively r...

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Bibliographic Details
Published in:Journal of financial and quantitative analysis 2021-08, Vol.56 (5), p.1653-1678
Main Authors: Bali, Turan G., Subrahmanyam, Avanidhar, Wen, Quan
Format: Article
Language:English
Subjects:
Bond markets
Consumption
Corporate bonds
Credit risk
Default
Economic activity
Hedging
Institutional investments
Investments
Investors
Macroeconomics
Quantitative analysis
Risk exposure
Risk factors
Risk premiums
Securities markets
Stock exchanges
Stocks
Treasuries
Uncertainty
Variables
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Summary:We examine the role of macroeconomic uncertainty in the cross section of corporate bonds and find a significant uncertainty premium for both investment-grade (IG) (0.40% per month) and non-investment-grade (NIG) (0.81% per month) bonds. The economic-uncertainty premium declines as we progressively remove downgraded bonds, indicating that the premium represents an increase in required returns for bonds with higher credit and macroeconomic risk. The economic-uncertainty premia vary across equities and bonds in a manner consistent with the heterogeneous risk-aversion levels of dominant players in equities (retail investors) versus bonds (institutional investors).
ISSN:0022-1090
1756-6916
DOI:10.1017/S0022109020000538