In total, the model can generate expected excess corporate bond returns in four ways. First,
through the dependence of credit spreads (or, equivalently, default intensities) on default-free
term structure factors. Second, because the risk of common or systematic changes in credit
spreads across firms is priced. Third, via a risk premium on firm-specific credit spread changes,
and, fourth, due to a risk premium on the default jump.
Empirically, we find that all these terms
contribute to the expected excess corporate bond return, except for the risk of firm-specific credit