Duration-Based Valuation of Corporate Bonds.

This article investigates the decomposition of corporate bond returns into duration-matched government bond returns and duration-adjusted excess returns, emphasizing the importance of accounting for duration in asset pricing. The authors find that most excess returns of corporate bonds relative to Treasury bills from 1986 to 2020 are driven by long-term Treasury returns rather than compensation for credit and liquidity risks, with investment-grade bonds earning only a small credit risk premium comparable to the convenience yield. Adjusting for duration resolves the capital asset pricing model's (CAPM) failure to price corporate bonds, as the CAPM better explains duration-adjusted returns than standard excess returns. The study further develops duration-adjusted CAPM variants that outperform existing multifactor bond pricing models, highlighting the role of nonstationary interest rate environments and suggesting partial market segmentation between equity and corporate bond markets.