“Skewness and Co-skewness in Bond Returns” by I-Hsuan Ethan CHIANG
I-Hsuan Ethan CHIANG
This paper explores skewness and co-skewness in discrete-horizon bond returns. Using data for 1976–2005, we find bond skewness is comparable to that in equities, varies with the holding period and varies over time. Speculative-grade bonds and collateralized securities have substantial negative skewness. Co-skewness against the market portfolio is priced differently in various bond sectors: taking a unit of co-skewness risk is rewarded with 0.43% and 2.47% per month for corporate bonds and collateralized securities, respectively. Coskewness risk helps explain the cross section of expected bond returns when other state variables such as inflation, real activity, or short term interest rates are included, or when conditioning variables are exploited.