Does the Long-Run Risk Explain the Cross-Section of Corporate Bond Returns?

We test whether long-run consumption risk can explain the cross-section of corporate bond risk premiums. We find that a one-factor model with long-run consumption growth explains the risk premiums on bond portfolios sorted on credit spreads, maturity, credit rating, downside risk, idiosyncratic volatility, and the betas with respect to shocks to financial intermediary's capital of He, Kelly, and Manela (2017). Furthermore, the estimated risk aversion coefficient declines as we increase the horizon to measure consumption growth, and a model with relatively low values of risk-aversion can match the observed risk premiums if we use 24-month growth rate as a risk factor.