Jump and volatility risk in the cross-section of corporate bond returns

Abstract

Investigating the pricing of jump and volatility risk in the cross-section of corporate bonds, we find that bonds with high jump and volatility betas have low expected returns. The jump and volatility risk effects are economically significant, exhibit an intra-rating pattern, and increase as ratings decrease. While both jump and volatility risk effects heighten during the subprime crisis period, jump risk becomes more important than volatility risk in times of stress. The pronounced negative jump and volatility risk premiums cannot be explained by coskewness, cokurtosis, or downside risk exposure and are robust to controlling for conventional risk factors and bond characteristics.