Risk and return in international corporate bond markets

Corporate bond returns in the major developed economies increase with risk, as measured by maturity and ratings. From a pricing perspective, we find little to no evidence against the World CAPM model, where the market consists out of equity, sovereign and corporate bonds. However, from a factor model perspective, local factors contribute substantially more to the variation of corporate bond returns than global factors. The factor exposures show intuitive patterns: as ratings worsen, equity betas show a hockey stick pattern, sovereign betas decline monotonically and corporate bond betas increase steeply. JEL Classification: G10, G11, G15