Topic: Do Distributional Characteristics of Corporate Bonds Predict Their Future Returns?
Speaker: Jennie Bai, Assistant Professor of Finance, McDonough School of Business, Georgetown University
Date: December 4th, 2014 (Thu.)
Time: 2:00-3:30pm
Location: Building 4, Room 101
Language: English
Abstract:
This paper investigates the significance of volatility, skewness, kurtosis, and downside risk in predicting the cross-sectional variation in future returns on corporate bonds. The results indicate a significantly positive (negative) link between volatility (skewness) and expected returns, whereas kurtosis does not have a robust incremental contribution to the predictability of bond returns. Bonds in the highest volatility quintile generate 6% to 8% more annual raw and risk-adjusted returns compared to bonds in the lowest volatility quintile. After controlling for volatility, bonds with low skewness generate 2.5% to 3% more annual raw and risk-adjusted returns compared to bonds with high skewness. The cross-sectional relation between downside risk and bond returns is even stronger than volatility and skewness. These findings remain intact after controlling for a large set of bond characteristics and risk factors. Hence, the distributional characteristics of corporate bonds are powerful determinants of the cross-sectional differences in future returns.
About the speaker:
Jennie Bai is currently an assistant professor of finance at McDonough School of Business, Georgetown University. Before 2013, she was an economist at the Federal Reserve Bank of New York for five years. She obtained her MBA and Ph.D. from University of Chicago. Jennie’s research interests are mainly in credit risk, liquidity risk, banking, derivative market and art market. His research has been published on several leading financial journals, such as Journal of Financial and Quantitative Analysis, and Review of Financial Studies.
