The information in the high-yield bond spread for the business cycle: evidence and some implications

The market for high-yield (below-investment-grade) corporatebonds developed in the middle 1980s. We show that, since thistime, the high-yield spread has had significant explanatorypower for the business cycle. We interpret this finding as possiblysymptomatic of financial factors at work in the business cycle,along the lines suggested by the financial accelerator. We alsoshow that over this period the high-yield spread outperformsother leading financial indicators, including the term spread,the paper-bill spread, and the Federal Funds rate. We conjecturethat changes in the conduct of monetary policy over time mayaccount for the reduced informativeness of these alternativeindicators, all of which are tied closely to monetary policy.     

A reexamination of the value of tax options

This article reexamines the value of tax trading when the taxrate on long-term realizations is less than that on short-termrealizations. In particular, the value of the option to realizelong-term capital gains and repurchase stock in order to increaseone's tax basis and restart the option to realize future lossesshort term is examined empirically. Our estimate of the incrementalvalue of restarting, which is based on the results of simulationsof several alternative tax trading policies over a large numberof independent return sequences, is generally much smaller thanthat reported by Constantinides (1984). The incremental valueof restarting is shown to depend critically on the particularpattern of realized returns and the assumed tax treatment ofunrealized capital gains at the end of the simulation period.The effects of stock price volatility, transaction costs, portfoliooffset rules, and realization cutoff levels on the value oftax trading are also investigated.     

The optimal trading and pricing of securities with asymmetric capital gains taxes and transaction costs

This article explores the optimal trading and pricing of taxablesecurities with asymmetric capital gains taxes and transactioncosts. In the long-term region, investors realize all gainsbelow some critical cutoff level, which we derive analytically.In the short-term region, investors defer all gains and, dependingupon the time remaining in the short-term region, may also defersmall losses. Contrary to common intuition, deferral of short-termlosses can be optimal even without transaction costs. The valueof tax timing is considerably higher under the optimal tradingstrategy than under alternative strategies previously analyzed.The impact of offset rules is also explored.