This dissertation studies the pricing of the credit risk premium and interest rate volatility risk in the cross-section of expected corporate bond returns. The results, which provide new insights into the understanding of corporate bond risk premium, are shown in two chapters.

In Chapter 1, we examine the question of whether the credit risk premium could be priced in the cross-sectional corporate bond returns. Using implied-CDS risk premium measures, we find that these variables have higher explanatory power for cross-sectional bond returns than the traditional default spread and ratings. The positive effect of the credit risk premium (CRP) factor on expected returns is pervasive, stronger for lower-rated bonds, and robust to controlling for conventional risk factors and bond characteristics. Besides the systematic CRP factor, idiosyncratic credit risk is also priced. The results show that the CRP beta effect in the cross-section of bond returns is largely a pure bond effect, which is not driven by the underlying structural model relationship between debt and equity.

In Chapter 2, we show that interest rate volatility risk is priced in the cross-section of corporate bond returns. Bonds with high sensitivity to interest rate volatility innovations have low expected returns, and this relationship is robust to controlling for equity volatility risk, conventional risk factors, and bond characteristics. The negative premium is stronger for low-grade bonds and when economic policy uncertainty is high. Idiosyncratic bond volatility positively affects returns, which is not due to exposure to aggregate volatility. Interest rate volatility affects bond premia through both specific impacts on firms’ fundamentals and broader effects on the macroeconomic environment.