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Applying the Market Model to Long-Term Corporate Bonds

Published online by Cambridge University Press:  06 April 2009

Gordon J. Alexander
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Extract

Recently the standard market model has been used to examine holding period returns of corporate bonds. These studies have involved issues such as: the impact of accounting earnings data on bond price behavior [5]; the relationship of bond betas and ratings [19, 21]; the effect of ratings changes on bond prices [27]; the relationship of bond betas to duration and yield [3, 13, 15]; bond performance of bankrupt and nonbankrupt firms [26]; and tests of the Capital Asset Pricing Model based on bond returns [7]. While the empirical appropriateness of applying the market model to common stock returns has been demonstrated, similar tests have not been conducted with regard to long-term corporate bonds. Section II of this paper will examine the assumptions of the normal error regression model when used in the form of the market model and applied to a sample of long-term corporate bonds during the early years of their lives. The issue of systematic changes in the regression parameters will be addressed in Section III. Lastly, conclusions will be presented in Section IV.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 15 , Issue 5 , December 1980 , pp. 1063 - 1080
Copyright
Copyright © School of Business Administration, University of Washington 1980

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