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).