High-yield versus investment-grade bonds: less risk and greater returns?
Using Bank of America/Merrill Lynch bond yield indexes, we compare the returns on investment-grade bonds to the returns on high-yield bonds over the period from January 1997 through mid-August 2011, a period marked by the collapse of the technology sector in early 2000 and the financial crisis in 2008. We compare return and risk measures under the assumption of a normal distribution with those obtained under the assumption of a stable distribution. When a normal distribution is assumed, we see a higher expected return associated with a lower SD on the high-yield bond returns relative to investment-grade bond returns. However, we also find that the returns on both high-yield bonds and investment-grade bonds exhibit stable (fat-tailed) distributions, with the fat tail more pronounced for the high-yield bond series. These results suggest that the assumption of a distribution that allows for fat tails and skewness is important for identifying the risk and return characteristics of these bond series.
Year of publication: |
2014
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Authors: | Li, Hsi ; McCarthy, Joseph ; Pantalone, Coleen |
Published in: |
Applied Financial Economics. - Taylor & Francis Journals, ISSN 0960-3107. - Vol. 24.2014, 20, p. 1303-1312
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Publisher: |
Taylor & Francis Journals |
Saved in:
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