Equity-Inspired Credit Risk Factors Complement Traditional Ones

We measure the benefits of using equity-inspired credit risk factors to explain risk in corporate bond markets. In addition to traditional credit factors—sector, rating, and duration—we show that the inclusion of carry, value, momentum, volatility, and liquidity risk factors, all constructed using only credit market data, significantly enhances our ability to measure systematic risk in corporate bond returns. Equity-inspired credit risk factors complement traditional ones: they account for about 50% of model performance. Our results are similar across investment-grade and high-yield markets and across US and European bond markets.