Macroeconomic and Financial Determinants of the Volatility of Corporate Bond Returns

In this paper, we address the issue of how macroeconomic conditions affect corporate bond volatility. We employ the GARCH-MIDAS multiplicative two-component model of volatility that distinguishes the short-term dynamics from the long-run component of volatility. Both the in-sample and out-of-sample analysis show that recognizing the existence of a stochastic low-frequency component captured by macroeconomic and financial indicators may improve the fit of the model to actual bond return data, relative to the constant long-run component embedded in a typical GARCH model.