Corporate bond returns and the financial crisis |
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| Institution: | 1. Institut de statistique, biostatistique et sciences actuarielles (ISBA), Université Catholique de Louvain, Louvain-la-Neuve, Belgium;2. Graduate Institute of Finance, National Taiwan University of Science and Technology, Taiwan;3. Department of Finance, National Taiwan University, Taiwan;1. Deutsche Bundesbank, Financial Stability Department, Wilhelm-Epstein-Strasse 14, 60431 Frankfurt am Main, Germany;2. German Institute for Economic Research (DIW Berlin), 10108 Berlin, Germany;3. Humboldt-Universität zu Berlin, Germany;1. Institute of Economics, Academa Sinica, 128 Academia Road, Section 2, Nankang, Taipei 115, Taiwan;2. Institute of Statistical Science, Academia Sinica, 128 Academia Road, Section 2, Nankang, Taipei 11529, Taiwan;3. Department of International Business, National Chengchi University, 64, Section 2, Zhi-nan Road, Wenshan, Taipei 116, Taiwan;1. The University of Alabama, Culverhouse College of Business, 200 Alston Hall, Tuscaloosa, AL 35487, United States;2. Department of Finance and Economics, Mississippi State University, 312 McCool Hall, Mississippi State, MS 39762-9580, United States |
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| Abstract: | We examine effects of government actions and related accounting policies on the corporate bond market implied by changes in relations between aggregate bond returns and cash flow and discount rate news. We capture the influence of risk by partitioning bonds into investment and speculative grades. We use earnings changes as a proxy for cash flow news and T-Bill rate changes as a proxy for discount rate news. As expected, during non-crisis periods, we observe a positive relation between earnings changes and bond returns and a negative relation for T-Bill rate changes. A combination of government bailouts of large financial institutions and mark-to-market accounting preserves the positive relation for earnings changes during the crisis for investment grade bonds, while absence of these factors leads to an insignificant relation for speculative grade. Intervention by the Federal Reserve to induce lower interest rates as earnings were declining, a flight to safety shifting demand from corporate bonds to T-Bills, and low cost funds invested in risk free investments explain a reversal of the relation between bond returns and T-Bill rate changes for both grades. |
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| Keywords: | Financial crisis Corporate bond returns Cash flow news Discount rate news Government relief Fair value accounting |
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