Downside Tail Risk and the Cross-section of Corporate Bond Returns in Korea

This study investigates the cross-sectional relationship between bond downside risk, quantified by 5% Value at Risk (VaR), and expected returns in the Korean corporate bond market from 2010 to 2019. Based on portfolio analyses and Fama-MacBeth regressions, we find a significant positive relationship between downside risk and subsequent bond returns, notably during economic expansions. The relationship diminishes during economic downturns, potentially influenced by the interaction between the interest rates and bond yields. Our findings hold even after controlling for other risk factors and bond characteristics.