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The Macroeconomic Uncertainty Premium in the Corporate Bond Market

Published online by Cambridge University Press:  06 July 2020

Turan G. Bali ,
Avanidhar Subrahmanyam  and
Quan Wen
Turan G. Bali*
Affiliation:
Georgetown University McDonough School of Business Turan.Bali@georgetown.edu
Avanidhar Subrahmanyam
Affiliation:
University of California at Los Angeles Anderson Graduate School of Management subra@anderson.ucla.edu
Quan Wen
Affiliation:
Georgetown University McDonough School of Business Quan.Wen@georgetown.edu
*
Turan.Bali@georgetown.edu (corresponding author)
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Abstract

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).

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 5 , August 2021 , pp. 1653 - 1678
Copyright
© The Author(s), 2020. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We are grateful to Pierluigi Balduzzi (the referee) and Hank Bessembinder (the editor) for their insightful and constructive feedback. We thank Daniel Barth, Martin Boyer, Charles Cao, Tolga Cenesizoglu, Jess Cornaggia, Ozgur Demirtas, Georges Dionne, Christian Dorion, Mathieu Fournier, Katherine Gleason, Vincent Gregoire, Anurag Gupta, Robert Hansen, Jiekun Huang, Jay Huang, Peter Iliev, Nishad Kapadia, Patrick Konermann, Jens Kvarner, Simon Lalancette, Anh Le, Francis Longstaff, Xuhui Pan, Jeffrey Pontiff, Valeri Sokolovski, David Solomon, Philip Strahan, Hassan Tehranian, Pascale Valery, Kamil Yilmaz, and Jianfeng Yu for their extremely helpful comments and suggestions. We also benefited from discussions with seminar participants at 2018 Center for Accounting Research and Education (CARE) Conference on Economic Uncertainty organized by the University of Notre Dame, BI Norwegian Business School, Boston College, Case Western Reserve University, the Federal Reserve Board, HEC Montreal, Koc University, the Office of Financial Research at the U.S. Department of the Treasury, Penn State University, Sabanci University, Tulane University, and the University of Illinois, Urbana–Champaign. We thank Kenneth French, Sydney Ludvigson, Lubos Pastor, and Robert Stambaugh for making a large amount of historical data publicly available in their online data library. All errors remain our responsibility.

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