Journal of Credit Risk

Systematic risk and yield premiums in the bond market

Liang Fu, Austin Murphy and Terry Benzschawel


This paper shows that traditional measures of bond systematic risk based on unadjusted past returns have very large downward biases. After we develop an improved method for calculating the market Betas of credit instruments, we conduct an empirical evaluation, which indicates that yield spreads are highly related to such estimates of systematic risk. The Betas, along with yields, enable us to estimate the overall price of risk that is found to be useful in predicting future returns on the aggregate market. These ex ante systematic risk premiums are discovered to be negatively related to past market returns on bonds and positively associated with past market volatility.

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