Give Credit Where Credit Is Due: What Explains Corporate Bond Returns?
Give Credit Where Credit Is Due: What Explains Corporate Bond Returns? AQR paper finds finds that options markets explain a great deal of credit returns. Two features of corporate bonds generate option exposure. The first is that a corporate bond is economically equivalent to a short put option on a firm’s assets. The second is that many corporate bonds include call provisions, which are basically options granted to the bond issuer.