The impact of hedging on the market value of equity

We examine the annual stock performance of firms that disclose the use of derivatives to hedge over the period 1995 to 1999. We find that only 21.6% of publicly traded U.S. corporations in our sample hedged with derivative instruments over this period and their use is concentrated in the larger companies. Similar to other studies we find that when derivatives are used, interest rate and currency securities are used much more frequently than commodity products. Our sample of 1308 companies that hedge outperforms other securities by 4.3% per year on average over our sample period. This result is robust to several alternative methods of estimating abnormal returns. When we segment performance by the type of hedge used, however, we find that the over-performance is due entirely to larger firms that hedge currency. We find no abnormal returns for firms hedging either interest rates or commodities. The abnormal returns in firms hedging currency is robust to alternative models that seek to control for exchange rate fluctuations and global equity returns; however, we find no significant abnormal returns to currency hedgers when using an augmented model that controls for the role of intangible assets.     

中国债券市场成长几何

当所有人都将目光投向国内如火如荼的股权分置改革之时,他却领导他的团队进驻了北京证券,获得了所有债券品种发行的牌照。当国内的券商还在生死线上徘徊的时候,他已经开始规划UBS在中国债券市场的未来定位。他就是瑞银UBS亚太区债务资本市场及风险管理联席主管曹为实先生。作为行业的专家,曹为实先生就中国债券市场未来发展等方面的问题接受了本刊记者采访     

The market for borrowing corporate bonds

This paper describes the market for borrowing corporate bonds using a comprehensive data set from a major lender. The cost of borrowing corporate bonds is comparable to the cost of borrowing stock, between 10 and 20 basis points, and both have fallen over time. Factors that influence borrowing costs are loan size, percentage of inventory lent, rating, and borrower identity. There is no evidence that bond short sellers have private information. Bonds with Credit Default Swaps (CDS) contracts are more actively lent than those without. Finally, the 2007 Credit Crunch does not affect average borrowing costs or loan volume, but does increase borrowing cost variance.     

The effect of issuance documentation disclosure and readability on liquidity: Evidence from green bonds

This paper investigates the potential effects of the disclosure and the readability of a green bond’s issuance documentation on its liquidity. Using a sample of 274 green bonds issued by both corporate and financial issuers (102 unique firms) worldwide (23 countries) from 2011 to 2018, we show that both the disclosure of green bond frameworks and annual reports and their readability increase the bond’s liquidity. Our results are robust to checks for endogeneity and to alternative estimation techniques. Both disclosure and readability have a more important impact on liquidity for bonds issued by nonfinancial (vs. financial) issuers, bonds with longer maturities, and those with lower credit ratings.     

The influence of product market dynamics on a firm's cash holdings and hedging behavior

Prior work suggests that if a firm shares a larger proportion of its growth opportunities with rivals, an inability to fully invest in these opportunities leads to predatory behavior on the part of rivals and losses in market share. We examine whether firms manage this predation risk. We find inter- and intra-industry evidence that the extent of the interdependence of a firm's investment opportunities with rivals is positively associated with its use of derivatives and the size of its cash holdings. Moreover, an analysis of investment behavior provides evidence that if this interdependence is high, the management of predation risk provides strategic benefits. Our results indicate that predation risk is an important determinant of corporate financial policy choices and investment behavior.     

The price of carbon risk: Evidence from China’s bond market

Using a 2009–2019 sample of Chinese bond issuers, we examine the effect of carbon risk on bond financing costs. Relative to low carbon risk issuers, high carbon risk issuers have substantially larger bond credit spreads, mainly because their credit risk is greater and they invest the funds in non-green projects. This positive relationship is more pronounced for issuers with financing constraints, those not making a green transition and those in cities with stringent environmental regulations. We find a reversed effect during the COVID-19 pandemic. However, China’s carbon peak and carbon neutral goals have renewed the focus on carbon risk. Carbon risk also causes bond issuers to scale back production and negatively affects their likelihood of receiving long-term financial support. Our findings suggest that investors consider carbon risk and charge a corresponding risk premium.     

The impact of regulation on market risk

While it is crucial to understand the impact of regulatory changes on market risk, the literature does not show how risk responds to expected regulatory changes that are specifically designed to change risk. Our paper fills this gap by providing a detailed study of one such case. Using both a sample of privatized U.K. companies, and U.K. and U.S. control portfolios, between 1993 and 2000, we show (both for the single-factor market model and the three-factor Fama-French model) that the observed changes in market risk are significant and consistent with theory.     

The effectiveness of interest-rate futures contracts for hedging Japanese bonds of different credit quality and duration

This study investigates the effectiveness of the Tokyo Stock Exchange (TSE)-traded Japanese 10-year JGB futures contract to hedge portfolios of Japanese bonds of differing maturity and credit quality. The bond portfolios examined are Government, AAA-, and AA-rated Eurobonds with maturities of 2, 3, 5, 7, 10, and 20 years. Consistent with the recent literature, the study employs univariate methods for calculating hedge ratios based on levels, first differences, and percentage change of each series. Out-of-sample forecasting is used to determine the effectiveness of the calculated hedge ratios for each of the bond portfolios and to determine which approach to calculating hedge ratios is the most effective. The results show that this particular futures contract does provide a good hedge, particularly for those bond terms closest to the 10-year term of the contract. There is some evidence, although not strong, that JGBs are better hedged than AAA and AA bonds. Investors should take some caution when using this futures contract to hedge bond portfolios of different maturities and credit ratings.     

The effect of foreign currency hedging on the probability of financial distress

This paper investigates the effect of foreign currency hedging with derivatives on the probability of financial distress. I use Merton’s (1974) structural default model to compute firms’ distance to default as a proxy for their probability of financial distress. Using an instrumental variables approach to control for endogenous hedging and leverage, I find that the extent of foreign currency hedging is associated with a lower probability of financial distress. Whereas previous research finds that the probability of financial distress is a determinant of a firm’s hedging policy, this paper provides direct evidence supporting the hypothesis that the extent of hedging reduces a firm’s probability of financial distress.     

Selective hedging strategies for crude oil futures based on market state expectations

This paper studies the ex-ante selective hedging strategies of crude oil futures contracts based on market state expectations and compares the hedging performances to the traditional minimum variance routine hedging strategies. The main advantage of the proposed method is that it achieves a trade-off between return and risk, rather than hedges risk at all costs. Specifically, we first use a multi-input Hidden Markov Model(HMM) to identify the market state, assess the market’s herding impact, and then integrate the findings of identification and measurement to forecast the price trend. We offer an adjustment criterion for the hedge ratios driven by GARCH²-type models based on the anticipated market state. We conducted an empirical analysis to examine the hedging effect of WTI and Brent crude oil futures, the results indicate that the proposed state-dependent hedging strategies are superior to the traditional model-driven hedging strategies concerning the hedged portfolio based on four criteria. The robustness check reveals that the proposed hedging strategies still outperform in different market situation. The findings can help traders in the crude oil markets, and the methodology can be applied to other energy markets.     

The effect of financial market development on bank risk: evidence from Southeast Asian countries

This paper examines how bank risk varies with changes in financial markets development in a broad data set of 52 publicly listed commercial banks in five Southeast Asian countries over a 23-year period between 1990 and 2012. A consequence of two financial crises (i.e. the Asian financial crisis of 1997–1998 and the global financial crisis of 2007–2009) provides a natural experiment in which linkages between financial markets development and bank risk are measured. Empirical results show that higher degrees of financial markets development are associated with weaker bank capital positions and are positively related to higher degrees of bank revenue diversification. There is also evidence for a U-shaped relationship between the degree of financial markets development and bank capital.     

Performance of utility-based strategies for hedging basis risk

The performance of optimal strategies for hedging a claim on a non-traded asset is analysed. The claim is valued and hedged in a utility maximization framework, using exponential utility. A traded asset, correlated with that underlying the claim, is used for hedging, with the correlation ρ typically close to 1. Using a distortion method (Zariphopoulou 2001 Finance Stochastics 5 61–82) we derive a nonlinear expectation representation for the claim’s ask price and a formula for the optimal hedging strategy. We generate a perturbation expansion for the price and hedging strategy in powers of ε²?=1?ρ². The terms in the price expansion are proportional to the central moments of the claim payoff under the minimal martingale measure. The resulting fast computation capability is used to carry out a simulation-based test of the optimal hedging program, computing the terminal hedging error over many asset price paths. These errors are compared with those from a naive strategy which uses the traded asset as a proxy for the non-traded one. The distribution of the hedging error acts as a suitable metric to analyse hedging performance. We find that the optimal policy improves hedging performance, in that the hedging error distribution is more sharply peaked around a non-negative profit. The frequency of profits over losses is increased, and this is measured by the median of the distribution, which is always increased by the optimal strategies. An empirical example illustrates the application of the method to the hedging of a stock basket using index futures.     

Mean-variance hedging in the presence of estimation risk

Review of Derivatives Research - The mean-variance hedging (MVH) with a significant risk-aversion coefficient is approximately equal to the minimum-variance (MV) hedge. However, how large the...     

Optimal hedging of demographic risk in life insurance

A Markov chain model is taken to describe the development of a multi-state life insurance policy or portfolio in a stochastic economic?Cdemographic environment. It is assumed that there exists an arbitrage-free market with tradeable securities derived from demographic indices. Adopting a mean-variance criterion, two problems are formulated and solved. First, how can an insurer optimally hedge environmental risk by trading in a given set of derivatives? Second, assuming that insurers perform optimal hedging strategies in a given derivatives market, how can the very derivatives be designed in order to minimize the average hedging error across a given population of insurers? The paper comes with the caveat emptor that the theory will find its prime applications, not in securitization of longevity risk, but rather in securitization of catastrophic mortality risk.     

The market value of decomposed carbon emissions

We introduce the decomposition of carbon emissions into an expected and an unexpected component and analyze the association between these components and firm value. The expected component captures a firm's average carbon emissions inherent to its business model and operating environment. The unexpected component, meaning the firm-specific deviation from expected carbon emissions, reflects the management's effort and ability to implement carbon management and actively influence carbon emissions. For a sample of US firms operating in carbon-intensive industries, we estimate the expected component using a regression of carbon emissions on firm characteristics and industry. The residual of this regression represents the unexpected component. The results reveal that, on average, investors attach value to both components. While investors consider the expected component to be relevant regardless of assurance, they consider the unexpected component to be more relevant in the presence of assurance. The assurance alleviates credibility concerns about the information content of the unexpected component. Additionally, we confirm the nomological validity of our measure of the unexpected component, as it is negatively related to indicators of better carbon management systems.     

推进债券市场与养老金制度体系改革

今年“两会”期间，全国政协委员、中央汇金投资公司副总经理赵海英在接受《国际融资》杂志记者专访时表示，要利用中国资本市场中长期利好的发展趋势，推进债券市场改革，抓紧完善养老金制度体系。     

The January effect for individual corporate bonds

We examine the presence, magnitude and determinants of a January effect for individual corporate bonds. Our results provide empirical evidence of positive and statistically (but not economically) significant abnormal returns in January across different event windows and models. Our results suggest that, in the addition to the term and default factors, the excess stock returns, size and book-to-market factors are priced for individual bond returns. We investigate a number of determinants of the January abnormal returns for individual bonds. Our findings suggest that the reversal and tax-loss selling effects are important determinants of the abnormal returns on individual bonds.     

银行间债券市场含权债估值问题研究

文章分析了银行间市场含权债实际成交价格的变动规律,介绍了市场实践中常用的定价方法,并对以理论模型为基础的一般估值方法进行了研究。结果发现,虽然目前市场上含权债的交易价格基本合理,但估值实践中较少利用理论模型,一般参考市价简单处理。含权债定价可以从建立二项式模型开始,逐步改变目前市场定价随意、缺少理论支撑的现状。     

What do we know about the price spillover between green bonds and Islamic stocks and stock market indices?

This paper investigates the risk transmission, linkages, and directional predictability between green bonds, Islamic stocks, and other asset classes. Using daily data from November 2008 to August 2020, we use the Standard & Poor's (S&P) Green Bond Index to represent the green bond market and the Dow Jones Islamic World Index and the S&P Global Shariah Indices to represent Islamic stocks. The other asset classes considered include the S&P 500 Stock Composite, S&P 500 Bond, and S&P 500 Energy indices. This paper uses the novel quantile cross-spectral (coherency), the windowed scalogram difference (WSD), and the cross-quantilogram (CQ) correlation approaches. The results from the quantile coherency analysis reveal a negative spillover effect from green bond price returns to Islamic stocks in the long run, which indicates that the green bond market poses a long-run systemic risk to Islamic stocks. From the WSD analysis, the results show that the integration between green bonds and Islamic stocks, the S&P 500 Stock Composite, and the S&P 500 Bond index is weaker during volatile market conditions. The CQ correlation suggests that the dependency between green bonds and other asset returns is concentrated in the lower quantiles and that this dependency is weaker at longer lags. Our results underscore the significance of green bonds in investor portfolios as a new investment asset class.     

Capturing the risk premium of commodity futures: The role of hedging pressure

We construct long–short factor mimicking portfolios that capture the hedging pressure risk premium of commodity futures. We consider single sorts based on the open interests of hedgers or speculators, as well as double sorts based on both positions. The long–short hedging pressure portfolios are priced cross-sectionally and present Sharpe ratios that systematically exceed those of long-only benchmarks. Further tests show that the hedging pressure risk premiums rise with the volatility of commodity futures markets and that the predictive power of hedging pressure over cross-sectional commodity futures returns is different from the previously documented forecasting power of past returns and the slope of the term structure.