Strategic Asset Allocation: The Role of Corporate Bond Indices?

2011 ◽  
Vol 01 (02) ◽  
pp. 355-422 ◽  
Author(s):  
Antonios Sangvinatsos
Keyword(s):  
Asset Allocation ◽  
Corporate Bond ◽  
High Yield ◽  
Portfolio Performance ◽  
Lower Grade ◽  
Out Of Sample ◽  
Bond Indices ◽  
The Business Cycle ◽  
Liquidity Premia ◽  
Investment Grade

This paper studies dynamic asset allocations across stocks, Treasury bonds, and corporate bond indices. We employ a new model where liquidity plays an important role in forecasting excess returns. We document the significant utility benefits an investor gains by optimally including corporate bond indices in his portfolio. The benefits are bigger for lower-grade bonds. We also find that investment-grade indices are different from high-yield indices in that different risks are priced in these two asset classes. One important difference is that there exist positive "flight-to-liquidity" premia in investment-grade bonds, but we find no such premia in high-yield bonds. We calculate the portfolio behavior and the utility benefits for three types of investors, the "sophisticated", the "average" and the "lazy" investor. We provide practical portfolio advice on investing throughout the business cycle and we study how the total allocations and hedging demands vary with the business conditions. In addition, utilizing our model, we evaluate the significance of the liquidity variable information for the investor. We find that the liquidity information greatly enhances the investor's portfolio performance. Finally, further support in the optimality of the strategies is provided by calculating their in- and out-of-sample realized returns for the last decade.

Determinants of Corporate Bond Trading: A Comprehensive Analysis

2017 ◽  
Vol 07 (02) ◽  
pp. 1750003 ◽  
Author(s):  
Edith Hotchkiss ◽  
Gergana Jostova
Keyword(s):  
Trading Volume ◽  
Private Equity ◽  
Corporate Bonds ◽  
Interest Rate Risk ◽  
Corporate Bond ◽  
High Yield ◽  
Insurance Company ◽  
Publicly Traded ◽  
Public Companies ◽  
Investment Grade

This paper studies the determinants of trading volume and liquidity of corporate bonds. Using transactions data from a comprehensive dataset of insurance company trades, our analysis covers more than 17,000 US corporate bonds of 4,151 companies over a five-year period prior to the introduction of TRACE. Our transactions data show that a variety of issue- and issuer-specific characteristics impact corporate bond liquidity. Among these, the most economically important determinants of bond trading volume are the bond’s issue size and age — trading volume declines substantially as bonds become seasoned and are absorbed into less active portfolios. Stock-level activity also impacts bond trading volume. Bonds of companies with publicly traded equity are more likely to trade than those with private equity. Further, public companies with more active stocks have more actively traded bonds. Finally, we show that while the liquidity of high-yield bonds is more affected by credit risk, interest-rate risk is more important in determining the liquidity of investment-grade bonds.

scholarly journals Multidimensional Copula Models for Parallel Development of the Us Bond Market Indices

2017 ◽  
Vol 69 (1) ◽  
pp. 61-73
Author(s):  
Jozef Komorník ◽  
Magdaléna Komorníková ◽  
Tomáš Bacigál ◽  
Cuong Nguyen
Keyword(s):  
Degrees Of Freedom ◽  
Heavy Tails ◽  
Tail Dependence ◽  
Corporate Bond ◽  
Bond Markets ◽  
Copula Models ◽  
Derivative Instruments ◽  
The Us ◽  
Bond Indices ◽  
Investment Grade

Abstract Stock and bond markets co-movements have been studied by many researchers. The object of our investigation is the development of three U.S. investment grade corporate bond indices. We concluded that the optimal 3D as well as partial pairwise 2D models are in the Student class with 2 degrees of freedom (and thus very heavy tails) and exhibit very high values of tail dependence coefficients. Hence the considered bond indices do not represent suitable components of a well-diversified investment portfolio. On the other hand, they could make good candidates for underlying assets of derivative instruments.

scholarly journals The role of high-yield bonds in strategic asset allocation over the Great Recession

2017 ◽  
Vol 14 (3) ◽  
pp. 270-279
Author(s):  
Georgios Menounos ◽  
Constantinos Alexiou ◽  
Sofoklis Vogiazas
Keyword(s):  
Asset Allocation ◽  
Risk Profile ◽  
Global Market ◽  
Risk Tolerance ◽  
High Yield ◽  
Strategic Asset Allocation ◽  
The Great Recession ◽  
Market Portfolio ◽  
Allocation Process ◽  
The Business Cycle

By utilizing a modified version of the Black-Litterman model, the authors explore the asset allocation to high-yield bonds based on an investor’s risk profile. In so doing, the researchers use US data on high-yield bonds and over the period 2007–2013. The key finding relates to the strategic asset allocation to high-yield bonds in a simulated global market portfolio depending on an investor’s risk tolerance. In particular, the share of high-yield bonds does not exceed 4.15% of total assets in a global market portfolio over the period 2007–2013, whilst the allocation remains relatively stable and small on a risk-adjusted basis, irrespective of an investor’s risk profile or the phase of the business cycle. In simple terms, the results suggest that high-yield bonds do not seem to merit a favorable treatment in the asset allocation process relative to other financial instruments in a global market portfolio.

scholarly journals Spread determinants in corporate bond pricing: The effect of market and liquidity risks

2020 ◽  
pp. 2-2
Author(s):  
Menevşe Özdemir-Dilidüzgün ◽  
Ayşe Altıok-Yılmaz ◽  
Elif Akben-Selçuk
Keyword(s):  
Risk Premium ◽  
Emerging Market ◽  
Corporate Bonds ◽  
Liquidity Risk ◽  
Market Liquidity ◽  
Corporate Bond ◽  
Bond Pricing ◽  
High Yield ◽  
Bond Liquidity ◽  
Investment Grade

This paper investigates the effect of market and liquidity risks on corporate bond pricing in Turkey, an emerging market, and in Europe. Results show that corporate bond returns have exposure to liquidity factors and not to market factors in both settings. Corporate bonds issued in Turkey have significant exposure to fluctuations in benchmark treasury bond liquidity and corporate bond market liquidity; while corporate bonds issued in Eurozone have exposure to equity market liquidity and are sensitive to fluctuations in a 10-year generic government bond liquidity. The total estimated liquidity risk premium is 0.7% per annum for Turkish ?A? and above graded corporate bonds, and 1.08% for the last investment grade level (BBB-) long term bonds. For Eurozone, the total liquidity risk premium is 0.27% for investment grade 5-10 year term bonds, 1.05% for high-yield 1-5 year term bonds and 1.02% for high-yield 5-10 year term category.

scholarly journals Semiparametric Estimation of a Corporate Bond Rating Model

Econometrics ◽  
2021 ◽  
Vol 9 (2) ◽  
pp. 23
Author(s):  
Yixiao Jiang
Keyword(s):  
Credit Rating ◽  
Conflicts Of Interest ◽  
Parametric Models ◽  
Corporate Bond ◽  
Index Structure ◽  
High Yield ◽  
Rating Data ◽  
Ordered Response ◽  
Investment Grade ◽  
Rating Model

This paper investigates the incentive of credit rating agencies (CRAs) to bias ratings using a semiparametric, ordered-response model. The proposed model explicitly takes conflicts of interest into account and allows the ratings to depend flexibly on risk attributes through a semiparametric index structure. Asymptotic normality for the estimator is derived after using several bias correction techniques. Using Moody’s rating data from 2001 to 2016, I found that firms related to Moody’s shareholders were more likely to receive better ratings. Such favorable treatments were more pronounced in investment grade bonds compared with high yield bonds, with the 2007–2009 financial crisis being an exception. Parametric models, such as the ordered-probit, failed to identify this heterogeneity of the rating bias across different bond categories.

Investors drawn to high-yield emerging market bonds

2017 ◽  
Keyword(s):  
Global Financial Crisis ◽  
Emerging Market ◽  
Corporate Bond ◽  
High Yield ◽  
Content Type ◽  
Volatility Index ◽  
Investment Grade ◽  
The Global Financial Crisis ◽  
Political Turmoil ◽  
Bond Spreads

Subject Emerging market corporate bonds enter bubble territory. Significance Strong appetite for higher-yielding emerging market (EM) assets this year has compressed corporate bond spreads the most since the global financial crisis, fuelling concerns of a bubble. The sharpest compression has occurred in Asia where spreads on the Asian component of JPMorgan’s benchmark EM corporate bond index have fallen below their mid-2014 post-crisis low. Low volatility and the enduring ‘search for yield’ are underpinning demand but the scope for a correction is increasing as valuations are increasingly stretched -- particularly in Asian high-yield, and in non-investment grade bonds -- while concerns are high about China’s crackdown on financial leverage. Impacts The dollar has erased its post-election gain; it may fall more in coming weeks. The oil price has risen 10% since May 9 on rising confidence that OPEC will extend output cuts but further increases will be limited. The ‘Vix’ equities volatility index, Wall Street’s ‘fear gauge’, is close to a historic low despite the political turmoil in Washington.

Extending Fama–French Factors to Corporate Bond Markets

2019 ◽  
Keyword(s):  
Explanatory Power ◽  
Corporate Bond ◽  
High Yield ◽  
The Us ◽  
Joint Return ◽  
Investment Grade ◽  
European Investment ◽  
Fama French Factors ◽  
Structural Credit Risk Models ◽  
The Impact

The explanatory power of size, value, profitability, and investment has been extensively studied for equity markets. Yet, the relevance of these factors in global credit markets is less explored, although equities and bonds should be related according to structural credit risk models. In this article, the authors investigate the impact of the four Fama–French factors in the US and European credit space. Although all factors exhibit economically and statistically significant excess returns in the US high-yield market, the authors find mixed evidence for US and European investment-grade markets. Nevertheless, they show that investable multifactor portfolios outperform the corresponding corporate bond benchmarks on a risk-adjusted basis. Finally, their results highlight the impact of company-level characteristics on the joint return dynamics of equities and corporate bonds.

On portfolio optimization

2016 ◽  
Vol 17 (3) ◽  
pp. 295-309 ◽  
Author(s):  
Theo Berger ◽  
Christian Fieberg
Keyword(s):  
Minimum Variance ◽  
Factor Models ◽  
Scale Factor ◽  
Covariance Matrices ◽  
Portfolio Performance ◽  
Content Type ◽  
Portfolio Decisions ◽  
Multi Scale ◽  
Out Of Sample ◽  
Factor Returns

Purpose The purpose of this paper is to show how investors can incorporate the multi-scale nature of asset and factor returns into their portfolio decisions and to evaluate the out-of-sample performance of such strategies. Design/methodology/approach The authors decompose daily return series of common risk factors and of all stocks listed in the Dow Jones Industrial Index (DJI) from 2000 to 2015 into different time scales to separate short-term noise from long-run trends. Then, the authors apply various (multi-scale) factor models to determine variance-covariance matrices which are used for minimum variance portfolio selection. Finally, the portfolios are evaluated by their out-of-sample performance. Findings The authors find that portfolios which are constructed on variance-covariance matrices stemming from multi-scale factor models outperform portfolio allocations which do not take the multi-scale nature of asset and factor returns into account. Practical implications The results of this paper provide evidence that accounting for the multi-scale nature of return distributions in portfolio decisions might be a promising approach from a portfolio performance perspective. Originality/value The authors demonstrate how investors can incorporate the multi-scale nature of returns into their portfolio decisions by applying wavelet filter techniques.

SEC permits abbreviated tender and exchange offers for non-convertible high-yield and investment-grade debt securities

2015 ◽  
Vol 16 (3) ◽  
pp. 28-29
Author(s):  
Ian B. Blumenstein ◽  
J. Eric Maki ◽  
John T. Owen
Keyword(s):  
Design Methodology ◽  
High Yield ◽  
Content Type ◽  
Efficient Mechanism ◽  
Practical Guidance ◽  
Traditional Structures ◽  
Investment Grade ◽  
Practical Implications

Purpose – To advise companies of a recent SEC no-action letter relating to tender and exchange offers for certain debt securities. Design/methodology/approach – Reviews various conditions allowing an issuer to use a shortened timeframe in which certain debt tender/exchange offers need be kept open for as few as five business days. Findings – The abbreviated debt tender/exchange offer structure contemplated by the no-action letter provides a more efficient mechanism for conducting debt tender/exchange offers in certain circumstances. Practical implications – Issuers conducting a debt tender/exchange offer should consider whether the new abbreviated structure is more effective in achieving their objectives than the more traditional structures. Originality/value – Practical guidance from experienced securities regulatory lawyers that gives an overview of important developments in debt tender/exchange offer practice.

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