Reconstructing a Century of U.S. Corporate Bonds: Credit Risk in Historical Perspective

Research

65 Pages

The authors construct a new historical corporate bond database spanning 128 years, from 1895 to 2022, allowing them to estimate a corporate bond counterpart to the equity risk premium. This longer historical sample reveals a sizable and statistically significant credit risk premium.

Key Takeaways

Long Sample Advantage: Over 1926 to 2022, B rated bonds earned a 5.88% credit risk premium versus 0.62% for AAA/AA, showing compensation rises with credit risk.
Recent Sample Misleads: In 1986 to 2022, IG credit premia were just 0.52% versus a 3.14% HY premium, suggesting recent decades understate long run credit compensation.
Database Depth Matters: The sample spans 128 years, 101,395 bonds, and 7,335,499 observations, giving the authors a much broader base than standard post 1973 datasets.
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