Research shows that a five-factor conditional model for corporate bond returns, with time-varying factor loadings, effectively captures the risks and returns associated with corporate bonds. This model outperforms previous models proposed in the literature. Additionally, a systematic bond investment portfolio based on our benchmark model demonstrates significant outperformance compared to leading corporate credit investment strategies. Furthermore, our findings suggest a closer integration between debt and equity markets than previously observed in the literature.
Image courtesy of interviewee. January 12, 2024