Economic Policy Uncertainty and the Cross-Section of Corporate Bond Returns

Document Type

Article

Publication Date

6-1-2022

Abstract

This article finds that economic policy uncertainty (EPU) is a systematic risk factor priced in the cross-section of corporate bonds. Bonds with high EPU beta have low expected returns, and this negative premium is robust to controlling for conventional risk factors, bond characteristics, and macroeconomic conditions and uncertainty. The effect of policy risk is pervasive, stronger for speculative-grade bonds, and priced in both US and foreign markets. The EPU risk effect is greater for firms that have higher earnings exposure to policy uncertainty, dependence on external financing, and effective tax rates; those with lower pre-tax interest coverage; and those that operate in regulation-intensive industries.

Identifier

85135441607 (Scopus)

Publication Title

Journal of Fixed Income

External Full Text Location

https://doi.org/10.3905/jfi.2022.1.134

ISSN

10598596

First Page

6

Last Page

44

Issue

1

Volume

32

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