Too Big to Diversify: Concentration Risk and the Pricing of Corporate Bonds

Abstract

This paper shows that concentration risk—the vulnerability arising from the dominance of a few corporate giants— is priced in corporate bonds. We construct a monthly concentration index from the asset share of the largest U.S. firms and estimate bond return sensitivities to its innovations. Rising concentration amplifies the transmission of firm-specific shocks, undermines issuer diversification, and heightens stress in fixed-income markets. Bonds that underperform more when concentration increases are compensated with higher subsequent returns. Our findings identify the distribution of firm size as a novel macro-structural source of priced risk, with important implications for portfolio allocation and financial stability.

Ali Shirazi

Assistant Professor of Finance

My research interests Asset Pricing, Granulity, and Corporate Bond Market.