The time-varying integration of euro area government bond markets

We derive a model in which a standard international capital asset pricing model (ICAPM) for government bonds is nested within an ICAPM with impediments to invest in the local government bond markets. Excess returns or risk premiums are then driven by a country-specific or idiosyncratic stochastic factor on top of the common factor which has a time-varying idiosyncratic impact on the premiums. With this model we investigate the financial integration of government bond markets over time through two channels. First, we allow for gradual convergence from the full ICAPM with impediments to the standard model through the vanishing of the idiosyncratic factors. Second, we allow for gradual equalization of the country-specific impacts of the common factor. State space methods are used to estimate the model with weekly government bond risk premiums for Belgium, France, Italy, Germany, and the Netherlands over the period 1995–2009. Our results suggest, first, that the idiosyncratic factors were almost eliminated by 2006 in all countries but Italy but then reappeared due to the financial crisis that started in 2007. Second, the country-specific exposures to the common international risk factor have converged across countries, with no setback during the crisis.     

Price connectedness between green bond and financial markets

We study price connectedness between the green bond and financial markets using a structural vector autoregressive (VAR) model that captures direct and indirect transmission of financial shocks across markets. Using heteroskedasticity to identify the structural VAR model parameters, our empirical findings reveal that the green bond market is closely linked to the fixed-income and currency markets, receiving sizeable price spillovers from those markets and transmitting negligible reverse effects. We also show that, in contrast, the green bond market is weakly tied to the stock, energy and high-yield corporate bond markets. These findings have implications in terms of portfolio and risk management decisions for environmentally aware investors holding positions in green bonds.     

The sources of momentum in international government bond returns

This study aims to offer a new explanation for the momentum effect in international government bonds. Using cross-sectional and time-series tests, we examine a sample of bonds from 22 countries for the years 1980 through 2018. We document significant momentum profits that are not attributable to bond-specific risk factors, such as volatility or credit risk. The global bond momentum is driven by the returns on underlying foreign exchange rates. Controlling for currency movements fully explains the abnormal returns on momentum strategies in international government bonds. The results are robust to many considerations including alternative sorting periods, portfolio construction methods, as well as subperiod and subsample analysis.     

中国可转债市场与股票市场的动态关系研究——基于DCC-MGARCH模型的分析

近年来,DCC-MGARCH模型已经被成熟地运用到对一些金融市场间关系的研究中,运用DCC-MGARCH模型对可转债市场与股票市场间的动态相关系数进行研究,采用全局综合与局部分析的方法,刻画上述两金融市场间相关系数的动态时变特征,结果表明：采用DCC-MGARCH模型对可转债市场与股票市场间关系的研究是有效且可行的。     

Sovereign bond market dependencies and crisis transmission around the eurozone debt crisis: a dynamic copula approach

We examine the dependency between the European government bond markets around the recent sovereign debt crisis. A dynamic copula approach is used to model the time-varying dependence structure of those government bond markets, evaluate the nature and strength of their dependencies over time, and gauge the transmission of the crisis shocks. Our results can be summarized as follows: i) the eurozone sovereign bond markets under consideration have a significant and positive dependence with the Greek and the EMU benchmark sovereign bond markets; ii) the dynamic-BB7 copula function best describes the dependence structure between these sovereign bond markets and provides evidence of asymmetric tail dependence; iii) the conditional probability of crisis transmission from Greece to other eurozone countries is higher than the other way around; and iv) Greece is the most vulnerable country when the eurozone entered into the sovereign debt crisis.     

我国银行间债券市场产品创新分析

文章通过对中国和美国债券品种的对比,认为美国债券市场的产品创新主要有两类:一是在期限、利率、利息支付、面值及持有期等债券构成要素上直接创新的产品;二是利用金融工程技术设计出来的债权衍生产品。而我国债券市场由于基础产品不健全、体制不顺及市场分割等原因导致无法进一步进行债券类衍生产品的创新。多层次资本市场的建立需要债券市场更多金融创新支持,而债券市场产品创新演进的过程应该首先是满足市场不断加深的需求,其次是逐步使用现代金融工程技术。文章认为债券市场创新的根本途径有两条:一是大力发展公司债券市场,这是持续进行产品创新的基础;二是发展与股权挂钩的债券创新产品,包括可转化债券、附认股权证的可分离交易债券和可交换债券等。并进一步提出了我国银行间债券市场还应从债券品种、利率、期限等几个方面进行品种创新,进而提高市场交易效率和流动性。     

Expected risk and excess returns predictability in emerging bond markets

This study examines the predictability of expected excess returns from eight emerging bond markets within an international asset pricing framework. Two sets of instruments are used, which include both world and local factors, to forecast emerging bond returns. Besides investigating the influence of the macroeconomic factors in specific countries on bond returns in those countries, this study also divides local factors into macroeconomic and financial factors. Unlike previous studies, we apply macroeconomic instruments that contain more information on excess returns as a proxy for local risk factors via principal component analysis methodology. The information variable approach enables the prediction of excess bond returns based on world and local factors and facilitating understanding of the degree of integration between emerging bond markets and developed bond markets. The results indicate that the bond market in emerging world is partially integrated to that in the developed world and the predictability of local factors that include both financial and macroeconomic information variables can forecast around 25–66% of the returns of emerging bonds. Incorporating the macroeconomic variables increases the explanatory power of the model. Both world and country-specific local instruments can forecast excess bond returns, but local instruments appear to be better predictors of such returns, particularly the local credit spread to US. Additionally, this study finds that investor risk aversion is significant among most of sample countries.     

Climate change implications for the catastrophe bonds market: An empirical analysis

Since their introduction in the mid-1990s, the return per unit of risk or multiple on catastrophe (cat) bonds has steadily declined. This paper investigates whether this pattern is consistent with the historical evolution of natural disaster risk, using average multiple figures over the period 1997–2017. Assessing the accuracy of cat bond pricing is important, since about 50% of outstanding risk capital in the cat bonds market is currently exposed to Atlantic hurricanes -a risk that global warming, among other disruptions, is found to enhance- and pension and mutual funds in European and other OECD countries currently own about 30% of the market. In this respect, while our findings suggest that falling multiples are primarily related to the Fed's expansionary monetary stance and to portfolio shift effects, we do also find evidence of significant undervaluation of global warming risk in the cat bonds market. This finding, also in light of the unfailing appetite of institutional investors for such securities, casts doubts over the sanity of the market and over cat bonds as suitable investment products for risk averse investors. Sounder investment opportunities might be found in the green bonds market, which allows for the funding of immediate investment in climate change mitigation too.     

Breakeven inflation rates and their puzzling correlation relationships

It is generally assumed that the two Fisher components of the interest rate – the real interest and the inflation – evolve independently over time, considering that they are driven by unrelated economical events. However, the market pricing of those components deduced from newly-available bond data does not provide conclusive evidence. While studying the price behaviour of inflation-linked (real) bonds beside nominal bonds in the major fixed-income markets, we observe that the Real Bond Yields (RBY) and the yield differentials, the Breakeven Inflation Rates (BEIR), have the propensity to be positively correlated between each other across the various countries, yet are pushed into a negative correlation relationship due to market-related price distortions. As long as those distortions are local, the net result is near-zero correlation within countries; when they become global, as in the heat of the current crisis, the correlations turn negative worldwide. In this article insight is gained by taking an innovative worldwide study approach and thanks to revealing crisis period events.     

The pricing of risk in emerging credit markets: Bonds versus loans

Much of the volatility in emerging markets in the 1990s stems from the fact that the major form of foreign investment is the bond rather than the bank loans which predominated until the debt crisis of the 1980s. Bondholders are too dispersed to negotiate with during a liquidity shortfall. Thus, a shortage of reserves becomes a full-blown crisis. This was not the case in the 1980s when banks, as the major creditors, often lent to countries in arrears. The risk to a loan is therefore rescheduling, while the risk to a bond is default. Empirically pricing loans and bonds as assets reveals that bonds incorporate the greater risk of default into their spreads. Debentures are thus riskier credit than loans. As developing countries now obtain most finance through these risky instruments, the volatility of the 1990s is better understood.     

Incomplete markets,liquidation risk,and the term structure of interest rates

We analyse the term structure of interest rates in a general equilibrium model with incomplete markets, borrowing constraint, and positive net supply of government bonds. Uninsured idiosyncratic shocks generate bond trades, while aggregate shocks cause fluctuations in the trading price of bonds. Long bonds command a “liquidation risk premium” over short bonds, because they may have to be liquidated before maturity – following a bad idiosyncratic shock – precisely when their resale value is low – due to the simultaneous occurrence of a bad aggregate shock. Our framework endogenously generates limited cross-sectional wealth heterogeneity among the agents (despite the presence of uninsured idiosyncratic shocks), which allows us to characterise analytically the shape of the entire yield curve, including the yields on bonds of arbitrarily long maturities. Agents? desire to hedge the idiosyncratic risk together with their fear of having to liquidate long bonds at unfavourable terms implies that a greater bond supply raises the level of the yield curve, while an increase in the relative supply of long bonds raises its slope.     

Forward-premium puzzle: is it time to abandon the usual regression?

The forward premium puzzle is usually evidenced by the rejection of the null hypothesis in the uncovered interest parity (UIP) regression. Because this parity need only hold in a risk-neutral world, a risk adjustment term is missing from the equation if speculation in foreign exchange markets is risky. We deal with this issue following the literature which assumes that discounted returns on foreign government bonds are log-normal, so we can linearize the Euler pricing equations (in level) and obtain a modified UIP system for which the risk adjustment term is obtained by applying to the pricing kernel-based relations a generalized autoregressive conditional heteroscedasticity-in-mean model. However, here we innovate by adopting a methodology which differs from all these related works. We construct and use a stochastic discount factor that does not depend on a specific model, by residing in the space of returns which we extract from the data by simply imposing the orthogonality restrictions represented by the Euler equations. So, we devise a purely statistical pricing kernel that performs well in in-sample level equations. Somewhat disappointingly, the risk premium inclusion in the conventional regression changes neither the significance nor the magnitude of the forecasting power of the forward premium for most currencies we study. The contrasting performance of the tests in level and in logs suggests that linearization may be to blame.     

Do investors in Green Bond market pay a premium? Global evidence

We examine the pricing difference of Green Bonds (GB) and conventional bonds (CBs) in capital markets worldwide. Credit spread is used to observe whether investors would like to pay a premium for GBs over CBs. This study uses panel data regression with hybrid model to analyse daily observations over the period 2016 to 2017. We employ Option-Adjusted spread (OAS) to measure the credit spreads of bonds while controlling for bond specific, macroeconomic and global factors that influence the spread. With the hybrid model used in the panel data analysis, we were able to capture the fixed-effects of variables in a random effect model. We find that GBs are traded at a premium of 63 basis points (BPS), compared with a comparable corporate bond issue. We find that the green label provides issuers an incentive to raise funds through issuing GBs while providing investors an opportunity to diversify their investments returns. Our findings provide several implications to the major stakeholders driving the GB market to scale up the market to finance the required level of global green investment needs. We stress an urgent need to support the growth of the GB market to achieve sustainable development through mitigating climate change challenges.

Abbreviation GB: Green Bond; CB: Conventional Bond; YS: Yield Spread; BPS: Basis Points; OAS: Option-Adjusted Spread; PCSE: Panels Corrected Standard Errors; CPI: Consumer Price Index; GBPs: Green Bond Principles; CBS: Climate Bond Standard     

Asset Prices and History: The Case of Austria

Historical events are reflected in asset prices. Looking at Austrian government bond prices traded on the Swiss stock exchange during WWII provides therefore a useful way of interpreting the importance the thousands of people directly and indirectly engaged in stock markets attributed to various war events. An econometric analysis of the relationship between government bond values and events in Austrian history reveals that some generally considered crucial events connected with WWII are clearly reflected in Austrian government bond prices. This holds, in particular for the beginning and the end of the war. The annexation of Austria by Germany in 1938 which seemingly looked as being overwhelmingly and passionately welcomed by the Austrian population negatively affected the evaluation of Austrian government bonds, i.e. it was considered to be to the disadvantage of Austria by the people who put their own personal fortune at risk.     

基于KMV模型的市政债券融资风险问题研究

城市基础设施是城市发展水平和文明程度的重要支撑,是城市经济和社会协调发展的物质条件,也是一个地区乃至一个国家经济和社会协调发展的基础。市政债券在国外特别是发达国家已经被广泛地运用于城市基础设施建设。对湖北省的市政债券的信用风险问题进行实证分析得出:应从市级债券的风险控制入手,严格控制其发行规模,从而将风险控制在可接受的范围内。运用KMV模型的实证债券信用风险测度模型。     

Do mutual fund flows affect the French corporate bond market?

We study whether investors’ withdrawals from mutual funds affect corporate bond prices. As mutual funds have become major players in the financial markets, they are likely to exert downward pressures on asset prices when facing investors’ redemptions, particularly in the less liquid markets such as corporate bonds. We use a novel dataset on the French bond funds and show that both flows in and out of mutual funds lead to a significant effect on the corporate bond yields. This effect is asymmetric as redemptions provoke a change in yields of greater magnitude than inflows. Moreover, all corporate bonds are not equally affected by investors’ withdrawals from funds: The more a bond is detained by funds, the higher the impact of redemptions on its yield. These three results are robust to various changes in econometric specifications.     

Who poisons the pool? Time-varying asymmetric and nonlinear causal inference between low-risk and high-risk bonds markets

Corporate bond markets enable the efficient allocation of capital among competing firms, as well as an extensive degree of disintermediation. While the role of the junk bond market in financing leveraged buyouts, “fallen angels,” start-ups, small firms, and sovereign governments is known, little is known about interactions between low-risk (AAA) bonds markets and high-risk (CCC and below) bonds markets. In this study, we used a sample of daily data spanning 20 years to investigate the dynamic link in first and second moments between low-risk and high-risk bonds during calm and turbulent periods in the U.S. financial markets. Using asymmetric and nonlinear causality tests, as well as the extended DCC-GJR-GARCH model, we found evidence of an asymmetric and nonlinear unidirectional causal link from high-risk to low-risk bonds markets, which intensifies during bear markets. There is a bidirectional volatility and shock transmission only during normal bond market conditions. The high-risk bonds market induces more destabilizing effects in the corporate bond market than the low-risk bonds market. The time-varying, highly persistent, and negative correlation during normal market conditions provides the opportunity for combining low-risk and high-risk bonds to diversify a portfolio.     

中国公司债券的发展现状和对策研究

公司债市场作为一种重要的融资渠道,在中国经济发展过程中处于重要的地位.中国公司债市场起步虽然较晚,但发展空间巨大、面临良好的发展机遇.发展中国的公司债券应着重注意以下几方面问题:充分发挥市场机制作用、强化信用评级和信用定价,规范信用评级机制,发展债券基金机构投资者,完善受托管理人制度,不断对公司债券条款设计进行创新.     

The pricing of bonds and bank loans in international markets: An empirical analysis of developing countries' foreign borrowing

Most recent empirical studies on creditworthiness and country risk have dealt with the international bank loan market, and have ignored the bond market in their effort to analyze the process of determination of default risk premia. In this paper data on both bank loans to the LDCs and on bonds issued by LDCs are used to analyze empirically several aspects related to developing countries' foreign borrowing and country risk. The paper analyzes three basic problems. First, some of the more important implications of modern models of LDCs foreign borrowing are tested. In particular the supposed positive effect of the level of indebtedness on the risk premium is investigated. Second, the pricing of bonds and bank loans are explicitly compared, in order to test whether, as sometimes has been argued, these two markets are significantly different. And third, data on yields on LDC bonds in the secondary market are analyzed to investigate the extent to which the market anticipated the debt crisis, and how it reacted to it.The main results obtained can be summarized as follows: First, both the bank loans and bonds data confirm some of the more important implications of foreign borrowing models. Specifically, the positive effect of higher debt ratios on the risk premium is confirmed. Second, it is found that the pricing of bonds and bank loans has somewhat differed. And third, it is found that the market anticipated by only a few weeks — and only partially — the world debt crisis of 1982. Finally, some policy implications that emerge from these findings are discussed.     

Long-term investment with stochastic interest and inflation rates: The need for inflation-indexed bonds

We examine the long term investment problem, under stochastic interest and inflation rates and within financial market incompleteness. Four basic financial assets are available on the financial market: a money market account (the cash), a real consumption good, a financial stock index and a bond with constant maturity. In this incomplete framework, we provide the general solution of the expected utility maximization. We compute the monetary loss from not having access to an inflation-indexed bond, in order to be hedged against the inflation risk. We show that this latter one usually reaches high levels (more than 1% per year). Thus, the magnitude of such costs reaches those of management fees or transaction costs. They highlight the significant value of introducing inflation-indexed bonds in the financial markets.