A Study of Corporate Bond Returns - using Sharpe-Lintner CAPM and Fama & French

Abstract: The aim of this thesis was to better understand corporate bond returns. Regression analysis for a sample of 937 listed USD-denominated corporate bonds of both investment grade and non-investment grade was conducted using two models. The first model used was the Sharpe (1964) and Lintner (1965) CAPM, the second a multi-factor model of Fama & French (1993). This study has broadened the research application of CAPM as previous use of the CAPM almost exclusively has focused on stock returns. We show that a large fraction of the variability of corporate bond returns can be captured using CAPM, but that Fama & French (1993) in comparison captures more of the variability. Additionally, we find that a market risk factor exists for the pricing of corporate bonds. This suggests systematic influence on corporate bond prices. The conclusion was supported both by results of the CAPM and the Fama & French regressions. We further criticize the model specification of the Fama & French (1993) default risk factor, suggesting that it contradicts subsequent research and more intuitively would be renamed to a corporate bond market factor.