Seasonality in the cross-section of stock returns

This paper presents a new pattern in the cross-section of expected stock returns. Stocks tend to have relatively high (or low) returns every year in the same calendar month. We recognize the annual cross-sectional autocorrelation pattern documented in Jegadeesh [1990. Evidence of predictable behavior of security returns. Journal of Finance 45, 881–898] at lags of 12, 24, and 36 months as part of a general pattern that lasts up to 20 annual lags, superimposed on the general momentum/reversal patterns. This pattern explains an economically and statistically significant magnitude of the cross-sectional variation in average stock returns. Volume and volatility exhibit similar seasonal patterns but they do not explain the seasonality in returns. The pattern is independent of size, industry, earnings announcements, dividends, and fiscal year. The results are consistent with the existence of a persistent seasonal effect in stock returns.     

Emerging market bond returns—An investor perspective

The novel features of this study consist in applying a conventional multifactor global market model to emerging market sovereign bond index rates of return that are denominated in US dollars and subsequently relating the unexplained residuals from the market model's estimates of each country's total bond index return to country-specific factors. They include political and financial risks as well as other presumed determinants of bond index rates of return. The results of our study confirm that sovereign countries’ bond index rates of return that include interest payments and capital gains/losses may be explained in terms of conventional bond pricing models by combining global market factors with local risk and other country-specific influences.     

Seasonality in stock returns and volatility: The Ramadan effect

Calendar anomalies in stock returns are well documented. Less obvious is the existence of seasonality in return volatility associated with moving calendar events such as the Muslim holy month of Ramadan. Using a GARCH specification and data for the Saudi Arabian stock market – now the largest stock market in the Muslim world – this paper documents a systematic pattern of decline in volatility during Ramadan, implying a predictable variation in the market price of risk. An examination of trading data shows that this anomaly appears to be consistent with a decline in trading activity during Ramadan. Evidence of systematic decline in volatility during Ramadan has significant implications for pricing of securities especially option-like products and asset allocation decisions by investors in the Islamic countries.     

An empirical analysis of implicit delivery options in the treasury bond futures contract

Assuming perfect, frictionless and efficient markets, this paper develops a framework to estimate the composite value of the quality, wild card and end-of-month options implicit in the T-bond futures contract. The value of delivery options is shown to be the excess of forward price of the cheapest bond over its conversion factor times the exercise price of futures contract. Empirical results indicate that the option values over the last quarter of the nearby contract are on average less than 0.5 percent of the mean futures price, which is substantially lower than the value reported by previous studies. Further scrutiny reveals that although the empirical estimates are contaminated by non-synchronous bond data, they are consistent with certain known theoretical properties of option values.     

Asymmetry in government bond returns

Is there asymmetry in the distribution of government bond returns in developed countries? Can asymmetries be predicted using financial and macroeconomic variables? To answer the first question, we provide evidence for asymmetry in government bond returns in particular for short maturities. This finding has important implications for modeling and forecasting government bond returns. For example, widely used models for yield curve analysis such as the affine term structure model assume symmetrically distributed innovations. To answer the second question, we find that liquidity in government bond markets predicts the coefficient of skewness with a positive sign, meaning that the probability of a large and negative excess return is more likely in a less liquid market. In addition, a positive realized return is associated with a negative coefficient of skewness, or a small probability of a large and negative return in the future.     

Term premiums in bond returns

This paper examines expected returns on U.S. Treasury bills and on U.S. Government bond portfolios. Expected bill returns are estimated from forward rates and from sample average returns. Both estimation methods indicate that expected returns on bills tend to peak at eight or nine months and never increase monotonically out to twelve months. Reliable inferences are limited to Treasury bills and thus to maturities up to a year. The variability of longer-term bond returns preempts precise conclusions about their expected returns.     

Effects of early bond refundings: An empirical investigation of security returns

This paper examines bond-for-bond refundings and their effects on stock returns. Refundings can affect the reported income, cash flows (including taxes), dividend constraints and financial ratios of firms. For a sample of 36 NYSE and ASE firms that performed refundings between 1971 and 1980, stock returns were significantly higher than predicted (only) around the release of the quarterly earnings announcement that included the refunding's effects. While the refundings were found to have many characteristics that were hypothesized to benefit shareholders, only the change in earnings per share was found to be associated with the prediction errors. Further, there appears to be no refunding-related information released in the quarterly earnings announcement, except for the refunding gain. These results imply that a portfolio of refunding firms can be created in advance of the quarterly earnings announcement that will generate abnormal returns around the earnings announcement. Because trading rules are inconsistent with the concept of an efficient capital market, these results constitute an anomaly.     

Risk factors in Australian bond returns

This study examines the risk factors in Australian bond returns. The study quantifies bond liquidity and estimates a liquidity risk factor in the Australian setting. We develop a three‐factor asset pricing framework that uses term, default and liquidity risk factors to explain the variation of Australian bond returns. Our findings corroborate the US evidence on the pervasiveness of these risk factors faced by bond investors. The three‐factor model developed in this study has practical applications when calculating the cost of debt, evaluating the performance of an active bond fund manager and hedging underlying risk in a bond portfolio.     

Correlations between stock returns and bond returns: income and substitution effects

We attempt to better understand the varying correlations between stock and bond returns across countries and over sample periods using international data. The observation is that there are two forces that affect the correlation between stock and bond returns. The force that drives a positive correlation is identified as the income effect. The force that drives a negative correlation is identified as the substitution effect. In combination, the two effects help determine the actual correlation between stock and bond returns. We contribute to the literature by proposing an empirical method, the structural vector autoregression (VAR) identification method, to identify the two—income and substitution—effects and to measure the relative importance of the two effects that determine the actual net relation between the two asset returns. We further provide some evidence that the income and substitution effects are related to, among other things, the size of the financial market, the growth and volatility (risk) of the economy, and the business cycle over time. In addition, the framework of the income and substitution effects helps us better understand the automatic stabilizing effects of the dynamic optimal asset allocation during business cycles.     

Spot and forward rates in the Canadian treasury bill market

The efficiency of the Canadian Treasury bill market is examined with data on spot and forward rates of return. Over the period from 7/62 to 3/79, the bill market has been efficient in the sense that it correctly uses the information contained in past spot rates in assessing the expected future spot rate and in determining the forward rate. Moreover, the forward rate is found to contain some information about future spot rates above and beyond that in past spot rates.     

Corporate bond yields and returns: a survey

Corporate bonds offer higher yields than government bonds with similar maturity. This higher reward comes at the cost of higher risk. The question then arises of how this risk is priced into corporate bonds. This literature review provides a classification and summary of papers studying corporate bond prices and the premium they offer to investors over the return on risk-free securities. The review ranges from theoretical models to empirical determinants of corporate bond prices. A specific section is dedicated to the liquidity impact as this component has received special attention.

     

Liquidity risk of corporate bond returns: conditional approach

We study the exposure of the US corporate bond returns to liquidity shocks of stocks and Treasury bonds over the period 1973–2007 in a regime-switching model. In one regime, liquidity shocks have mostly insignificant effects on bond prices, whereas in another regime, a rise in illiquidity produces significant but conflicting effects: Prices of investment-grade bonds rise while prices of speculative-grade (junk) bonds fall substantially (relative to the market). Relating the probability of these regimes to macroeconomic conditions we find that the second regime can be predicted by economic conditions that are characterized as “stress.” These effects, which are robust to controlling for other systematic risks (term and default), suggest the existence of time-varying liquidity risk of corporate bond returns conditional on episodes of flight to liquidity. Our model can predict the out-of-sample bond returns for the stress years 2008–2009. We find a similar pattern for stocks classified by high or low book-to-market ratio, where again, liquidity shocks play a special role in periods characterized by adverse economic conditions.     

Dispersion in news sentiment and corporate bond returns

We construct a news sentiment index at the firm level by using textual analysis of news articles and find that dispersion in news sentiment is a significant predictor of corporate bond returns. Bonds of firms with high dispersion in news sentiment have a highly significant average return of 7.38 percent. A portfolio that longs bonds with high dispersion in news sentiments and shorts bonds with low dispersion earns an average biweekly return of 8.53 percent. This finding is in line with an argument that dispersion in news sentiment is a proxy for future cash flow uncertainty.     

Predicting returns in the stock and bond markets

Several predetermined variables that reflect levels of bond and stock prices appear to predict returns on common stocks of firms of various sizes, long-term bonds of various default risks, and default-free bonds of various maturities. The returns on small-firm stocks and low-grade bonds are more highly correlated in January than in the rest of the year with previous levels of asset prices, especially prices of small-firm stocks. Seasonality is found in several conditional risk measures, but such seasonality is unlikely to explain, and in some cases is opposite to, the seasonal found in mean returns.     

Macroeconomic announcements and asymmetric volatility in bond returns

This study analyses the impact of macroeconomic news announcements on the conditional volatility of bond returns. Using daily returns on the 1, 3, 5 and 10 year US Treasury bonds, we find that announcement shocks have a strong impact on the dynamics of bond market volatility. Our results provide empirical evidence that the bond market incorporates the implications of macroeconomic announcement news faster than other information. Moreover, after distinguishing between types of macroeconomic announcements, releases of the employment situation and producer price index are especially influential at the intermediate and long end of the yield curve, while monetary policy seem to affect short-term bond volatility.     

Seasonality in returns on the Chinese stock markets: the case of Shanghai and Shenzhen

This paper investigates seasonal patterns in stock returns on the Shanghai and Shenzhen stock markets. The paper documents several interesting findings. First, unlike studies for other stock markets, the highest daily returns on both exchanges occur on Thursday rather than Friday. Second, price change limits exert an effect on the observed daily pattern of returns. Third, daily stock returns appear to be positively correlated with risk. This result is at odds with the majority of findings for other stock exchanges around the world. Finally, the paper documents other differences in seasonal patterns on the two exchanges.     

Classifying returns as extreme: European stock and bond markets

I consider extreme returns for the stock and bond markets of 14 EU countries using two classification schemes: One, the univariate classification scheme from the previous literature that classifies extreme returns for each market separately, and two, a novel multivariate classification scheme that classifies extreme returns for several markets jointly. The new classification scheme holds about the same information as the old one, while demanding a shorter sample period. The new classification scheme is useful.     

Distress risk premia in expected stock and bond returns

Prior studies find that shareholders’ strategic actions over debtholders are significant for stock prices but not for bond prices. I find that for firms with private and public debt, strategic default has no significant effect on distress risk premia in expected stock or bond returns, suggesting that the dispersion of bondholders greatly weakens the shareholder advantage effect. The shareholder advantage effect on stock prices is only significant for firms with only private debt and to some degree affected by the dispersion of stockholders and complexity in capital structure. Overall, renegotiation friction helps explain the cross-sectional implications of strategic default for stock and bond prices.     

Short-term patterns in government bond returns following market shocks: International evidence

We employ government bond portfolios from 17 countries in order to investigate the short-run reaction of investors to price shocks. Our findings indicate a uniform return reversal pattern across countries, that persists irrespective of various robustness tests such as different datasets (Datastream/J.P. Morgan), different maturity bands, and day-of-the-week effects. Simulated trading strategies based on our results suggest that this pattern can be employed to generate economically significant profits for many country portfolios. We also demonstrate that significant zero-investment profits are possible even when instead of the expensive to replicate country bond portfolios we employ directly tradable and low transactions cost instruments, such as Bond Futures Contracts.