SKEWNESS AND COSKEWNESS IN BOND RETURNS

Bond skewness and coskewness (i.e., bond return comovement with market volatility) are both time varying, with cross-sectional variation driven by maturity and credit rating. Other things being equal, longer maturity bonds have lower skewness, and lower coskewness with respect to the bond market index; lower quality bonds have lower skewness, and higher coskewness with respect to the bond market index. Three-moment bond alphas (which account for coskewness effects) are time varying and predictable by market default spread. They are significantly different from, and often are closer to zero than, two-moment alphas (which ignore coskewness effects).