When knowledge is power: Evidence from the municipal bond market

I investigate whether access to fundamental information enhances retail investors’ bargaining power, reducing the premium that small municipal bond investors pay over large investors. I find a reduction in this small trade premium after the introduction of an online disclosure repository that lowers retail investors’ information acquisition costs. This finding is limited to issuers whose disclosures are disseminated through the repository. The finding is pronounced for issuers that impose high information acquisition costs on investors ex-ante and those that exhibit high disclosure quality ex-post. These results suggest that as investors’ information sets align, so does their bargaining power with dealers.     

Active currency management of international bond portfolios

This paper focuses on the estimation and implementation of a holistic quantitative yield-curve-based approach to managing multi-currency bond portfolios. The primary task of the presented model is to manage the portfolio risk and return by exploiting inefficiencies in the emergent complexity of both currency and bond markets to generate alpha. Instead of using proxy variables, the expected return and risk parameters are estimated directly using their underlying simplicity and connectivity, period by period at specific moments in time, thus generating time diversification with aggressive risk taking and positioning. As a result, the strategies described in this paper can be classified as both alpha hunters and generators.     

经典波动模型下的最优债券投资组合

文章认为,由于利率和股价兼有相同的趋势性和波动性属性,股价经典波动模型对利率建模具有研究价值。通过引入经典的波动模型,结合极大似然估计的方法,本文探讨了无风险债券的最优投资方案,并将该成果运用于全球主要国债市场进行实证模拟投资,结果表明,该模型在全球主要国债市场均能取得较好的超额收益。     

Influence peddling in municipal bond markets

The municipal bond market is currently a topic of SEC scrutiny, courtroom debate, congressional investigation and media investigation in both the financial and general press. Rule G-37 (MSRB 1994) prohibits any player in the bond market from doing business with a state or local government or their funding entities for 2 years after that firm’s dealers, bond professionals or political action committee(s) contribute to an officeholder in those governments. This rule was prompted by the widespread perception that influence over municipal bond transactions is routinely used by elected officials to extract contributions from market players. This rule has also exposed the MSRB to intense criticism that it is de facto interfering in the political process. This research project addresses one aspect of the controversy: the reputed relation between political contributions and municipal bond transactions. We use elected officials and related bond issues in the State of Louisiana as the study subject. Our results provide only weak support for a connection between contributions from market players and the cost of public issues.     

Using linear and goal programming to immunize bond portfolios

Bierwag and Khang's (1979) model of immunizing a portfolio of default-free government bonds is expanded here to include default-grade corporate bonds. The immunizing equation is found to be slightly different. Both linear and goal programming are shown to be alternative techniques for identifying an investor's optimal immunizing portfolio.     

Efficiency with costly information: a reinterpretation of evidence from managed portfolios

We investigate the informational efficiency of mutual fund performancefor the period 1965-84. Results are shown to be sensitive tothe measurement of performance chosen. We find that returnson S&P stocks, returns on non-S&P stocks, and returnson bonds are significant factors in performance assessment.Once we correct for the impact of non-S&P assets on mutualfund returns, we find that mutual funds do not earn returnsthat justify their information acquisition costs. This is consistentwith results for prior periods.     

Opportunistic financial reporting around municipal bond issues

Understanding how government officials exercise discretion over financial reporting is essential for citizens, regulators, and researchers to interpret and monitor financial performance. I examine two measures of discretion in governmental financial statements: abnormal accruals in full accrual financial statements, and other financing sources and uses in modified accrual financial statements. Using a unique dataset of hand-collected financial data from California, I document empirically that municipal governments pursue a break-even income in both sets of financial statements, and that they focus particularly on avoiding deficits. Further, I find evidence that municipalities employ discretionary accruals but not other financing sources and uses to a greater extent before issuing bonds. Prior to bond issuance, officials facing deficits use less discretion. The results highlight the multidimensional and sometimes conflicting incentives government officials face, and the reporting strategies they use as they weigh the expected costs and benefits of using accounting gimmicks to report favorable bottom lines.     

美国市政债市场发展及借鉴意义

当前,局部地方债务引发的系统性风险已引起中央高度重视,财政部、中国人民银行等部委在近期开启了市政债的研究工作。文章从美国市政债财政体制基础与市政债券的财务特点、发行要素及其近年一级市场和二级市场结构变化等方面,系统介绍了美国市政债市场的发展经验和运行特点,并总结了其对于发展我国市政债市场的启示。     

Local religious beliefs and municipal bond market outcomes

This study investigates whether religion-induced risk aversion affects municipal bond market outcomes from 1990 to 2017. The results indicate that local government bonds issued from U.S. counties with a high Catholic-to-Protestant population ratio have lower credit risk ratings and lower yield spreads, and are less likely to have credit enhancement. The results stand up to additional tests. I control for issuer's county political party affiliation and state term limits, and continue to find significant effects. The effects are not driven by the issuer's county fiscal policies. Furthermore, the effects persist when I use an alternate specification that controls for omitted factors that are time invariant. Overall, my evidence suggests that a bond issuer's religion-induced risk aversion plays a significant role in the pricing of local government bonds.     

Market segmentation and international diversification across country and industry portfolios

We conjecture that partially segmented stock indexes that are characterized by low correlation with the world market are mainly priced by local factors and should produce abnormal returns relative to a global asset-pricing model. This implies a negative relation between correlation and future index returns in the presence of segmented indexes. Empirical evidence confirms such a relationship for the sample of industry indexes, suggesting a heterogeneous segmentation. However, we do not observe a similar pattern for country indexes. In addition, the international diversification potential of industries does not vanish during volatile periods. The hypothesis that the negative relationship should be stronger for the more segmented subsamples that are characterized by small market size and emerging country origin is verified for the industry sample. Thus, cross-industry diversification is superior to mere cross-country diversification.     

GASB mandatory disclosure rules and municipal bond yield spreads

The implementation of the Government Accounting Standards Board’s Statement 45 mandates disclosure of “other post-employment benefits” (OPEB) in a standardized format. The mandate provides an opportunity to analyze noninformation impacts of mandatory disclosures, as key components of the information were already publicly available. We find that this mandate is associated with a significant 15 and 73 basis-point increase in yield spreads among tax-exempt and taxable bonds, respectively. This effect is particularly pronounced for riskier bonds—nonrated and longer maturity taxable bonds. However, states that do not follow the GASB 45 recommendation of prefunding the OPEB obligations face a greater increase in their yield spreads.     

Measuring the unmeasurable: an application of uncertainty quantification to Treasury bond portfolios

We extract from the yield curve a new measure of fundamental economic uncertainty, based on McDiarmid’s diameter and related methods for optimal uncertainty quantification (OUQ). OUQ seeks analytical bounds on a system’s behaviour, even where aspects of the underlying data-generating process and system response function are not completely known. We use OUQ to stress test a simple fixed-income portfolio, certifying its safety—i.e. that potential losses will be ‘small’ in an appropriate sense. The results give explicit tradeoffs between: scenario count, maximum loss, test horizon, and confidence level. Unfortunately, uncertainty peaks in late 2008, weakening certification assurances just when they are needed most.     

An analytic approach to credit risk of large corporate bond and loan portfolios

We derive an analytic approximation to the credit loss distribution of large portfolios by letting the number of exposures tend to infinity. Defaults and rating migrations for individual exposures are driven by a factor model in order to capture co-movements in changing credit quality. The limiting credit loss distribution obeys the empirical stylized facts of skewness and heavy tails. We show how portfolio features like the degree of systematic risk, credit quality and term to maturity affect the distributional shape of portfolio credit losses. Using empirical data, it appears that the Basle 8% rule corresponds to quantiles with confidence levels exceeding 98%. The limit law's relevance for credit risk management is investigated further by checking its applicability to portfolios with a finite number of exposures. Relatively homogeneous portfolios of 300 exposures can be well approximated by the limit law. A minimum of 800 exposures is required if portfolios are relatively heterogeneous. Realistic loan portfolios often contain thousands of exposures implying that our analytic approach can be a fast and accurate alternative to the standard Monte-Carlo simulation techniques adopted in much of the literature.     

Accounting information and municipal bond net interest cost: An empirical evaluation

The objective of this study was to test the association between the surplus/deficit of selected Minnesota municipalities and the net interest cost of the general obligation bonds issued by these municipalities. This objective was accomplished by employing a pooled time-series design.A two-way analysis of variance was used to determine if there was a significant difference in the effect of net interest cost between positive and negative forecast errors. The ANOVA results of both tests indicate that the surplus/deficit is not correlated with increases/ decreases in the net interest cost of the bonds issued by a municipality. The results were unaffected by the exclusion of bond ratings as an independent variable.     

Generating optimal true interest cost bids for new municipal bond competitive issues

In 1984 over $95 billion of new tax-exempt debt issues were sold to the public. A criterion for judging competitive bids which is enjoying an increase in usage is that of minimizing true interest cost (internal rate of return). The true interest cost bidding problem may be formulated as a non-linear integer program. By utilizing a novel linearization in concert with a special purpose integer programming algorithm, minimum true interest cost bids can be generated in a matter of seconds. Computational results from an actual bidding problem are presented.     

Deferred outflows of resources and deferred inflows of resources and municipal bond borrowing cost

The Governmental Accounting Standards Board (GASB) under Concepts Statement No. 4, Elements of Financial Statements (2007a) introduced two new elements to government financial reporting: deferred outflows of resources and deferred inflows of resources. Given the large size of the municipal bond market, and the debate surrounding the GASB’s development of financial reporting requirements for these new elements, we investigate the associated changes to governments’ financial statements and the extent to which these changes may have influenced municipal borrowing costs.Our findings indicate that many governments were impacted by the introduction of the new financial statement elements, and the amounts reported as deferred outflows (inflows) of resources are negatively (positively) associated with interest costs on newly issued general obligation bonds. These findings should be informative to the GASB and users of municipal financial reports, such as bond market participants. Overall, our findings counter arguments made that the new financial statement elements would create needless complexity and confusion by suggesting a potential benefit of the financial statement changes.     

Attribute substitution in household vehicle portfolios

Roughly three quarters of vehicles are purchased into multi-car households. We study whether households are willing to substitute attributes, such as fuel economy, across vehicles within their portfolio. We develop a novel strategy to separately identify idiosyncratic preferences for an attribute from these within-portfolio effects. Using the universe of household vehicle registration records in California over a 6-year period, we find that two-car households exhibit strong substitution across vehicles when faced with an exogenous change to fuel intensity of a kept vehicle. This effect can erode a substantial portion of the benefit from major policies, such as Cash-for-Clunkers.     

Optimal portfolios in commodity futures markets

We develop a general approach to portfolio optimization in futures markets. Following the Heath–Jarrow–Morton (HJM) approach, we model the entire futures price curve at once as a solution of a stochastic partial differential equation. We also develop a general formalism to handle portfolios of futures contracts. In the portfolio optimization problem, the agent invests in futures contracts and a risk-free asset, and her objective is to maximize the utility from final wealth. In order to capture self-consistent futures price dynamics, we study a class of futures price curve models which admit a finite-dimensional realization. More precisely, we establish conditions under which the futures price dynamics can be realized in finite dimensions. Using the finite-dimensional realization, we derive a finite-dimensional form of the portfolio optimization problem and study its solution. We also give an economic interpretation of the coordinate process driving the finite-dimensional realization.