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.

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.

US energy high-yield bonds spur default risk

2015 ◽  
Keyword(s):  
Interest Rates ◽  
Default Risk ◽  
Oil Price ◽  
High Yield ◽  
Content Type ◽  
The Past ◽  
The Us ◽  
Low Interest Rates ◽  
Investment Grade ◽  
Energy Companies

Subject Impact of the oil price drop on energy high-yield bonds. Significance The over 50% oil price drop since June 2014 is hitting bonds issued by energy companies, particularly those issued by sub-investment grade corporates. The US high-yield bond market has been growing rapidly over the past five years. The shale boom has generated considerable investment, mainly funded through the issuance of these bonds which benefit from historically low interest rates. As the oil price has plunged, the spread over Treasury yields paid by the average issuer in the energy subsector has more than doubled between July and the December 2014 peak. Impacts Yields currently offered by the energy subsector are not far from pricing in a default scenario. Persistently low oil prices will further darken the outlook for the energy subsector and the high-yield market generally. A possible default cycle in the energy sector could accelerate outflows, overstretching the sector further.

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.

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 Impact of Readability on Corporate Bond Market

2019 ◽  
Vol 12 (4) ◽  
pp. 184 ◽  
Author(s):  
Jieyan Fang-Klingler
Keyword(s):  
Transaction Costs ◽  
Annual Report ◽  
Bond Market ◽  
Corporate Bond ◽  
Credit Spreads ◽  
Annual Reports ◽  
Corporate Bond Market ◽  
Market Participants ◽  
The Us ◽  
The Impact

This paper investigates the impact of annual report readability on the corporate bond market. My findings indicate that in the US corporate bond market, firms with less readable annual reports tend to have higher credit spreads, higher credit spread volatilities, higher transaction costs, higher transaction costs volatility, smaller trade size, higher number of trades and higher number of trades volatility. This paper also provides the first answers to the question as to whether annual report readability matters to international market participants in the corporate bond market. My findings provide evidence that in the EUR corporate bond market, firms with more readable annual reports are associated with lower credit spreads.

January sentiment effect in the US corporate bond market

2018 ◽  
Vol 10 (4) ◽  
pp. 370-386 ◽  
Author(s):  
Zhongdong Chen ◽  
Karen Ann Craig
Keyword(s):  
Fixed Effects ◽  
Investor Sentiment ◽  
Bond Market ◽  
Corporate Bond ◽  
Content Type ◽  
Corporate Bond Market ◽  
The Us ◽  
Bond Spreads ◽  
The Impact ◽  
Allocation Decisions

Purpose The purpose of this paper is to investigate the impact of January sentiment on investors’ asset allocation decisions in the US corporate bond market during the rest of the year. Specifically, the study evaluates if the shift in January sentiment is a predictor of corporate bond spreads from February to December. Design/methodology/approach Using corporate bond trades reported in TRACE between 2005 and 2014, the authors examine the ability of the Index of Consumer Sentiment and the Index of Investor Sentiment to predict bond spreads over the 11 months following January. The study evaluates both the sign of the change in sentiment and the magnitude of the change in sentiment using two generalized linear models, controlling for industry, bond and firm fixed effects. Portfolios are analyzed based on yield, firm size and firm leverage. Additional analysis is performed to ensure results are robust to the impacts of the subprime financial crisis. Findings This paper finds that the changes in the sentiment measures in January predict bond spreads associated with bond trades in the subsequent 11 months, and this phenomenon, which the authors label as the “January sentiment effect,” has opposing impacts on risky and less risky bond portfolios. Originality/value This paper adds to the literature on the relationship between sentiment and investor’s allocation decisions. The evidence documented in this study is the first known to find that investors’ allocation decisions in a year are driven by their sentiment in January.

scholarly journals Simultaneous Analysis of Insurance Participation and Acreage Response from Subsidized Crop Insurance for Cotton

2021 ◽  
Vol 14 (11) ◽  
pp. 562
Author(s):  
Ibrahima Sall ◽  
Russell Tronstad
Keyword(s):  
Crop Insurance ◽  
Rate Of Return ◽  
Risk Exposure ◽  
High Yield ◽  
Marginal Effect ◽  
Combined Effects ◽  
Simultaneous System ◽  
The Us ◽  
The Impact ◽  
Positive Effect

US crop insurance is subsidized to encourage producers to participate and reduce their risk exposure. However, what has been the impact of these subsidies on insurance demand and crop acres planted? Using a simultaneous system of two equations, we quantify both insurance participation and acreage response to subsidized crop insurance for cotton-producing counties across the US at the national and regional levels. We also quantify the impact of both the realized rate of return and the expected subsidy per pound, plus the combined effects of expected yield and price while accounting for the adoption of Bacillus thuringiensis (Bt) technology and other factors. Results show that both the rate of return and the expected subsidy per unit of production have a statistically significant and positive effect on the percentage of arable acres planted. Furthermore, the marginal effect of expected price on insurance participation is much more significant for low- than high-yield counties. Results indicate that not all regions respond the same to subsidized crop insurance and that subsidies should be based on dollars per expected unit of production rather than expected production to be less distorting. Overall, US cotton acreage response is estimated to be inelastic (0.58) to insurance participation.

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.

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