Alexander Dickerson, Christian Julliard, and Philippe Mueller are working on a project sponsored by Inquire Europe. The project is scheduled to be finalized in the Summer 2024.
After six decades of empirical research, the sources of risk driving prices in the corporate bond market remain unclear and ill-defined, despite its size and first order relevance for firm financing. Leveraging recent advances in Bayesian econometrics (Bryzgalova, Huang, and Julliard, 2023), we bridge this gap. We provide a comprehensive analysis of every factor and model proposed to date, as well as the possible combinations, and their interplay with asset pricing factors identified in the equity market literature. This allows us to identify both the robust sources of priced risk, and a novel benchmark Stochastic Discount Factor (SDF), which values corporate bonds, in-and out-of-sample, significantly better than any competing model.
Read more in the extended summary on our website.