What Do We Know about Corporate Bond Returns?

Recently, there has been a fast-growing literature on the determinants of corporate bond returns, in particular, the driving force of cross-sectional return variation. In this review, we first survey recent empirical studies on this important topic. We discuss cross-sectional evidence as well as time-series evidence. We then present a model-based analysis of individual corporate bond returns using the structural approach for credit risk modeling. We show, among other things, that the expected corporate bond return implied by the Merton model predicts 1-month-ahead corporate bond returns in the cross section.