Liquidity and credit premia in the yields of highly-rated sovereign bonds

This paper quantifies liquidity and credit premia in German and French government bond yields. For this purpose, we estimate term structures of government-guaranteed agency bonds and exploit the fact that differences in their yields vis-à-vis government bonds are mainly driven by liquidity effects. Adding information on benchmark rates, we estimate liquidity and credit premia as latent factors in a state-space framework. The results allow us, first, to quantify the price impact of safe-haven flows on sovereign yields, which strongly affected very liquid bond markets during the recent financial crisis. Second, we quantify credit premia for highly rated governments, offering an important alternative to the information based on CDS markets.     

Asset pricing models and economic risk premia: A decomposition

The risk premia of linear factor models on economic (non-traded) risk factors can be decomposed into: i) the premium on maximum-correlation portfolios mimicking the factors; ii) (minus) the covariance between the non-traded components of the pricing kernel and the factors; and iii) (minus) the mispricing of the maximum-correlation portfolios. For a given set of assets available for investment, the first component is the same across models and is typically estimated with little bias and high precision. We conclude that the premia on maximum-correlation portfolios are appealing alternatives to the risk premia of linear factor models, with the dividend yield being the only economic factor significantly priced.     

Asset pricing,time-varying risk premia and interest rate risk

This paper investigates the role of interest rate risk in explaining security price changes. We develop and test a two-factor linear beta pricing model of security returns in which the factors are the excess returns on the long-term, riskless bond and the equal-weighted equity market index. We find that time-variation in the interest rate and market risk premia influence expected security returns. Furthermore, conditional interest rate volatility affects security returns, particularly during periods of substantial interest rate movements.     

Risk premia in option markets

Risk premia are related to price probability ratios or for continuous time pure jump processes the ratios of jump arrival rates under the pricing and physical measures. The variance gamma model is employed to synthesize densities with risk premia seen as the ratio of the three parameters. The premia are shown to be mean reverting, predictable, focused on crashes at shorter horizons and rallies at the longer horizon. Predicted premia may be used to adjust physical parameters to develop option prices based on time series data.     

Simulation-based pricing of convertible bonds

We propose and empirically investigate a pricing model for convertible bonds based on Monte Carlo simulation. The method uses parametric representations of the early exercise decisions and consists of two stages. Pricing convertible bonds with the proposed Monte Carlo approach allows us to better capture both the dynamics of the underlying state variables and the rich set of real-world convertible bond specifications. Furthermore, using the simulation model proposed, we present an empirical pricing study of the US market, using 32 convertible bonds and 69 months of daily market prices. Our results do not confirm the evidence of previous studies that market prices of convertible bonds are on average lower than prices generated by a theoretical model. Similarly, our study is not supportive of a strong positive relationship between moneyness and mean pricing error, as argued in the literature.     

The role of time-varying jump risk premia in pricing stock index options

This paper examines out-of-sample option pricing performances for the affine jump diffusion (AJD) models by using the S&P 500 stock index and its associated option contracts. In particular, we investigate the role of time-varying jump risk premia in the AJD specifications. Our empirical analysis shows strong evidence in favor of time-varying jump risk premia in pricing cross-sectional options. We also find that, during a period of low volatility, the role of jump risk premia becomes less pronounced, making the differences across pricing performances of the AJD models not as substantial as during a period of high volatility. This finding can possibly explain poor pricing perfomances of the sophisticated AJD models in some previous studies whose sample periods can be characterized by low volatility.     

Risk premia in international equity markets revisited

Recent evidence suggests that global equity markets are becoming more risky. We develop a model to explain risk premia in international equity markets. The model is then used to investigate the changing nature of conditional risk premia and their effect on unconditional global risk. Using this model we find that the increase in international variance and covariance of realized excess returns can be attributed to systematic variations in global risk premia correlated across markets as well. Understanding this additional source of increased global correlation is important. These results have interest both for practitioners and for those interested in modeling global asset prices.     

Risk premia in crude oil futures prices

If commercial producers or financial investors use futures contracts to hedge against commodity price risk, the arbitrageurs who take the other side of the contracts may receive compensation for their assumption of nondiversifiable risk in the form of positive expected returns from their positions. We show that this interaction can produce an affine factor structure to commodity futures prices, and develop new algorithms for estimation of such models using unbalanced data sets in which the duration of observed contracts changes with each observation. We document significant changes in oil futures risk premia since 2005, with the compensation to the long position smaller on average in more recent data. This observation is consistent with the claim that index-fund investing has become more important relative to commerical hedging in determining the structure of crude oil futures risk premia over time.     

A continuous time approach to the pricing of bonds

This paper develops an arbitrage model of the term structure of interest rates based on the assumptions that the whole term structure at any point in time may be expressed as a function of the yields on the longest and shortest maturity default free instruments and that these two yields follow a Gauss-Wiener process. Arbitrage arguments are used to derive a partial differential equation which must be satisfied by the values of all default free bonds. The joint stochastic process for the two yields is estimated using Canadian data and the model is used to price a sample of Government of Canada bonds.     

Term structure estimation and pricing of callable Treasury bonds

This article describes a methodology of term structure estimation incorporating callable Treasury bonds using a bond-option valuation model. This article also examines whether some simple approximation of the option value suffice for providing a useful estimation procedure. The authors find that the errors in estimating the option value can generate significant errors for estimating the discount function. A call provision on a Treasury bond is not negligible at least our framework. This procedure is consistent with two aspects of the Treasury market. First, it provides the discount function that best determines the prices of observed Treasury securities, and second, it obtains a discount function that explains callable Treasuries.     

Risk premia,asset price bubbles,and monetary policy

We develop a dynamic general equilibrium asset pricing model with heterogeneous beliefs to study the effects of monetary policy on prices, risk premia, asset price bubbles, and financial stability. We propose a new framework for monetary policy with respect to bubbles. Because bubble risk premia arise from an interaction between disagreements among investors and dynamic trading constraints, under a non-accommodative monetary policy, liquidity adjusted risk and bubble risk premia increase. What matters for policy is the trading constrained fraction/mass of agents that disagree about fundamentals (i.e. optimists/pessimists). Accommodative policy can lead to a larger fraction of trading constrained agents that disagree, larger bubbles, and increased systemic risk. An implication of our results is that accommodative monetary policy in response to the Covid-19 crisis does not increase systemic risk due to asset price bubbles, as long as the policy keeps inflation under control.     

Banks,firms and the relative pricing of tax-exempt and taxable bonds

The traditional analysis of the relative pricing of tax-exempt and taxable debt is a habitat theory of the term structure of interest rates. In the traditional analysis the preferences of investors for particular maturities of debt lead to unique pricing relations at every point on the yield curve which are indicative of investor marginal tax brackets. Recent work by Fama (1977) suggests that banks are potential arbitrageurs across tax-exempt and taxable bond markets which force a particular equilibrium on the pricing of short-term bonds. Miller (1977) suggests that the choice of debt or equity financing by firms in the aggregate forces a similar equilibrium on the pricing of all tax-exempt and taxable bonds. This paper exploits the institution of Regulation Q and its effects on the banking system to bring evidence to bear on the predictions of these three models.     

The valuation of nonsystematic risks and the pricing of Swedish lottery bonds

Swedish government lottery bonds have coupon payments determinedby lottery. They offer a unique opportunity to study a securitywith uncertain payoffs having a known, observable distribution.The risk associated with the lotteries is idiosyncratic by constructionand should not command a risk premium in equilibrium. The bondsare traded in two forms, allowing us to evaluate the rewardsto bearing extra lottery risk. Despite its idiosyncratic nature,we find prices appear to reflect aversion to this risk. We evaluatethe empirical determinants of this differential pricing andpossible explanations for it.     

开发性金融债券的发行和创新实践

开发性金融债券的发行和创新实践活动,不仅有效促进了开发性金融机构融资体制的完善和中国债券市场的发展,还推动了中国金融体系和金融结构的调整和转变,开发性金融债券发行和创新的方式、方法和成功经验,值得总结。     

Risk premia: Exact solutions vs. log-linear approximations

We derive exact expressions for the risk premia for general distributions in a Lucas economy and show that the errors when using log-linear approximations can be economically significant when the shocks are nonnormal. Assuming growth rates are Normal Inverse Gaussian (NIG) and fitting the distribution to the data used in Mehra and Prescott (1985), the coefficient of relative risk aversion required to match the equity premium is more than halved compared to the finding in their article. We also consider a standard long-run risk model and, by comparing our exact solutions to the log-linear approximations, we show that the approximation errors are substantial, especially for high levels of risk aversion.     

An analytic approximation formula for pricing zero-coupon bonds

This paper presents an analytic approximation formula for pricing zero-coupon bonds, when the dynamics of the short-term interest rate are driven by a one-factor mean-reverting process in which changes in the volatility of the interest rate are a function of the level of the interest rate.     

Catastrophe bond pricing in the primary market: The issuer effect and pricing factors

COVID pandemic has highlighted the importance of hedging against catastrophic events, for which the catastrophe bond market plays a critical role. Our paper develops a two-level modelling and uses a unique, hand-collected dataset, which is one of the largest and most detailed datasets to date containing: 101 different issuers, 794 different bonds, spanning 1997–2020. We identify issuer effects robustly, isolating them from bond specific pricing effects, therefore providing more credible pricing factor results. We find that bond pricing and volatility are heavily impacted by the issuer, causing 26% of total price variation. We also identify specific issuer characteristics that significantly impact bond pricing and volatility, such as the issuer’s line of business accounting for up to 36% of total price variation. We further find that issuer effects are significant over different market cycles and time periods, causing substantial price variation. The size and content of our data also enables us to identify the counter-intuitive relation between bond premiums and maturity, and bond premiums and hybrid bond triggers.     

Risk dynamics surrounding the issuance of convertible bonds

This paper analyzes the risk dynamics surrounding convertible bond offerings (CBOs) and Seasoned Equity Offerings (SEOs). As convertible bonds are commonly believed to be very effective at mitigating adverse selection or overinvestment problems we would expect differing risk and return patterns for convertible bond and seasoned equity issuers. By analyzing 1148 convertible bond offerings and comparing them to 2905 seasoned equity offerings, we show however that for both issuer types the systematic risk increases prior to issuance and drops sharply thereafter. This result is consistent with the notion of exercising real options, as growth options are always riskier than the underlying assets and exercising them at issuance causes an immediate drop in risk. The real option framework and the proposed dynamics of systematic risk also provide a rational explanation for the negative announcement effect, as well as any long-term underperformance subsequent to the CBO and the SEOs.