Publication: Macroeconomic and Financial Determinants of the
Volatility of Corporate Bond Returns
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2014-07
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Abstract
This paper analyzes the relationship between the volatility of corporate bond returns and standard financial and macroeconomic indicators reflecting the state of the economy. We employ the GARCHMIDAS multiplicative two-component model of volatility that distinguishes the short-term dynamics from the long-run component of volatility. Both the in-sample and out-of-sample analysis show that recognizing the existence of a stochastic low-frequency component captured by macroeconomic and financial indicators may improve the fit of the model to actual bond return data, relative to the constant long-run component embedded in a typical GARCH model.
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The authors acknowledge financial support from the Ministry of Science and Innovation through grant ECO2011-29751 (B. Nieto), and the Ministry of Economics and Competitiveness through grants ECO2012-34268 (G. Rubio), and ECO2012-31941 (A. Novales). Financial support from Generalitat Valenciana grant PrometeoII/2013/015 is also acknowledged. We thank Rafael de Rezende, and seminar participants at University of Navarra, University Complutense, and the XXI Finance Forum at IE Business School for helpful comments on the paper. We assume full responsibility for any remaining errors.
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