The Relationship of Bond Betas to Bond Returns and Agency Ratings with a Test of the Capital Asset Pricing Model

Abstract

Bond betas are estimated and shown to be related to bond ratings. Bond betas tend to rise as rating class falls. Bond betas are stable over long time periods. Examination of the CAPM model using both bonds and stocks shows no market segmentation, with both bonds and stocks lying along the same line. The inclusion of bonds in the estimation gives a zero-beta estimate that is closer to the risk-free rate than when bonds are excluded.