Pre‐Issuance Hedging of Fixed‐Rate Debt

This article analyzes several corporate hedging strategies to manage interest rate risk on fixed‐rate debt prior to issuance. The authors start by considering these strategies using a highly stylized model: a binomial forward interest rate tree that, while simple in design, illustrates derivative pricing methodologies that are used in practice. Under a given rate volatility assumption, they demonstrate expected outcomes when entering a forward bond contract, a forward‐starting pay‐fixed interest swap, and a purchased option on that swap, as well as the “default” alternative of doing nothing. In principle, the decision of whether or not to hedge, as well as how to do so, depends on management's view of future interest rate volatility and degree of comfort with possible outcomes. The authors then assess the pros and cons of hedging strategies, with considerable emphasis on practical considerations. For example, while their theoretical model would allow an issuer to “lock” a specific debt issuance, in practice one can hedge only “benchmark” interest rate risk. The authors describe the use of both Treasury locks and forward‐starting swaps to address unexpected benchmark yield changes, and discuss how factors such as the time to issuance affect an issuer's choice of instrument. For instance, Treasury locks are typically used when the time to issuance is relatively short, while interest rate swaps are more common for longer times to issuance. The article also discusses circumstances in which a “do nothing” strategy may be preferable to other alternatives, as well as the disadvantages of issuing in advance. Finally, the authors describe the impact of financial accounting on different hedge strategies.     

SECONDARY MORTGAGE MARKET PURCHASE COMMITMENT YIELDS

We provide empirical evidence that quoted secondary market mortgage yields conform to the predictions of option theory. We compare Fannie Mae and Freddie Mac origination yields offered in the secondary market from 1985 to 2003 with the predictions of a two‐state binomial mortgage option valuation model. Our two‐state approach considers a mean‐reverting interest rate process as well as a stochastic housing price. Using predictions from option simulations, we find strong links between market practice and mortgage option prepayment and default factors over time. We also find cross‐sectional differences that are consistent with the institutional structure of the markets.     

Identifying volatility risk premia from fixed income Asian options

Fixed income options are frequently adopted by companies to hedge interest rate risk. Their payoff dependence on the cumulative short-term rate makes them particularly informative about interest rate volatility risk. Based on a joint dataset of bonds and Asian interest rate options, we study the interrelations between bond and volatility risk premia in a major emerging fixed income market. We propose a dynamic term structure model that generates an incomplete market compatible with a preliminary empirical analysis of the dataset. Approximation formulas for at-the-money Asian option prices avoid the use of computationally intensive Fourier transform methods, allowing for an efficient implementation of the model. The model generates a bond risk premium strongly correlated with a widely accepted emerging market benchmark index (EMBI-Global), and a negative volatility risk premium, consistent with the use of Asian options as insurance in this market.     

Pairs trading in the UK equity market: risk and return

In this paper, we provide the first comprehensive UK evidence on the profitability of the pairs trading strategy. Evidence suggests that the strategy performs well in crisis periods, so we control for both risk and liquidity to assess performance. To evaluate the effect of market frictions on the strategy, we use several estimates of transaction costs. We also present evidence on the performance of the strategy in different economic and market states. Our results show that pairs trading portfolios typically have little exposure to known equity risk factors such as market, size, value, momentum and reversal. However, a model controlling for risk and liquidity explains a far larger proportion of returns. Incorporating different assumptions about bid-ask spreads leads to reductions in performance estimates. When we allow for time-varying risk exposures, conditioned on the contemporaneous equity market return, risk-adjusted returns are generally not significantly different from zero.     

Oil Risk Exposure: The Case of the U.S. Oil and Gas Sector

We estimate oil price risk exposures of the U.S. oil and gas sector using the Fama‐French‐Carhart's four‐factor asset pricing model augmented with oil price and interest rate factors. Results show that the market, book‐to‐market, and size factors, as well as momentum characteristics of stocks and changes in oil prices are significant determinants of returns for the sector. Oil price risk exposures of U.S. oil and gas companies in the oil and gas sector are generally positive and significant. Our study also finds that oil price risk exposures vary considerably over time, and across firms and industry subsectors.     

Risk-taking and performance of government bond mutual funds

This paper investigates the risk exposures of government bond mutual funds and how risk-taking behavior affects fund performance. Government bond mutual funds often outperform their respective benchmark bond indexes before but not after adjusting for bond market risk factors. We show that the risk-taking behavior of fund managers helps to explain the different performances of government bond funds with and without controlling for the risk factors. Our results suggest that risk-taking leads to higher returns relative to benchmarks in normal risk periods but lower returns in high risk periods, suggesting that fund managers consistently take risky bets in fund management. We further show that the risk-taking of government bond funds is persistent and that investors typically have no ability to differentiate between the skill and risk components of fund performance. These findings suggest why fund managers have incentives to take consistently risky positions.     

The Performance of Hedge Fund Strategies and the Asymmetry of Return Distributions

We present hedge fund performance estimates that adjust for stale prices, Fama‐French risk factors and skewness. We contrast these new performance estimates with traditional performance measures. Using three‐factor models to adjust for staleness in prices and to incorporate Fama‐French factors along with the Harvey‐Siddique (2000) two‐factor model that incorporates skewness, we find that for the period 1990–2003, all hedge fund categories achieve above average performance when measured against an aggregate market index. More significantly, however, when we estimate performance at the individual hedge fund level, we discover that only 40 to 47% of the funds are shown to achieve an above average performance over that time period depending on the model used. These results have important implications for investors, endowments and pensions when they choose hedge fund managers.     

Stock Returns and Volatility: Pricing the Short‐Run and Long‐Run Components of Market Risk

We explore the cross‐sectional pricing of volatility risk by decomposing equity market volatility into short‐ and long‐run components. Our finding that prices of risk are negative and significant for both volatility components implies that investors pay for insurance against increases in volatility, even if those increases have little persistence. The short‐run component captures market skewness risk, which we interpret as a measure of the tightness of financial constraints. The long‐run component relates to business cycle risk. Furthermore, a three‐factor pricing model with the market return and the two volatility components compares favorably to benchmark models.     

我国货币政策框架转型中货币市场基准利率体系构建研究

随着利率市场化的推进以及货币政策框架由数量型向价格数量型并重转型,当前我国急需尽快培育有效的基准利率,以疏通货币政策传导渠道,提高货币政策调控效果。本文通过理论分析和实证研究,得出如下结论：我国货币政策框架转型中构建的基准利率,必须是个包含长短期利率的组合基准利率体系;我国货币市场利率虽然还不完全具备基准利率的要素,但是在基准利率体系中具有重要地位;当前我们可以7天回购作为政策利率、以shibor作为货币市场基准利率,同时,应加快完善市场和政策环境以培育shibor的基准性。     

Local Currency Sovereign Risk

We introduce a new measure of emerging market sovereign credit risk: the local currency credit spread, defined as the spread of local currency bonds over the synthetic local currency risk‐free rate constructed using cross‐currency swaps. We find that local currency credit spreads are positive and sizable. Compared with credit spreads on foreign‐currency‐denominated debt, local currency credit spreads have lower means, lower cross‐country correlations, and lower sensitivity to global risk factors. We discuss several major sources of credit spread differentials, including positively correlated credit and currency risk, selective default, capital controls, and various financial market frictions.     

The Over‐the‐Counter Theory of the Fed Funds Market: A Primer

We present a dynamic over‐the‐counter model of the fed funds market and use it to study the determination of the fed funds rate, the volume of loans traded, and the intraday evolution of the distribution of reserve balances across banks. We also investigate the implications of changes in the market structure, as well as the effects of central bank policy instruments such as open market operations, the discount window lending rate, and the interest rate on bank reserves.     

Path-dependent scenario trees for multistage stochastic programmes in finance

The formulation of dynamic stochastic programmes for financial applications generally requires the definition of a risk–reward objective function and a financial stochastic model to represent the uncertainty underlying the decision problem. The solution of the optimization problem and the quality of the resulting strategy will depend critically on the adopted financial model and its consistency with observed market dynamics. We present a recursive scenario approximation approach suitable for financial management problems, leading to a minimal yet sufficient representation of the randomness underlying the decision problem. The method relies on the definition of a benchmark probability space generated through Monte Carlo simulation and the implementation of a scenario reduction scheme. The procedure is tested on an interest rate vector process capturing market and credit risk dynamics in the fixed income market. The collected results show that a limited number of scenarios is sufficient to capture the exposure of the decision maker to interest rate and default risk.     

Interest Rate Risk Rewards in Stock Returns of Financial Corporations: Evidence from Germany

The interest rate sensitivity of stock returns of financial and non-financial corporations is a well-known phenomenon. However, only little is known about the part of total stock returns that is attributable to the compensation an investor receives for being exposed to interest rate risk when investing in equity securities. We pursue here a benchmark portfolio approach, constructing benchmark portfolios having the same interest rate risk exposure as a particular stock. By studying the time series of returns of these asset-specific benchmarks, we find: i) Regardless of the industry considered, the interest rate risk benchmarks of German corporations have mostly earned a significantly positive reward. ii) Returns of interest rate risk benchmarks of financial institutions exceeded significantly those of non-financial corporations. iii) An investor willing to bear nothing but the average interest rate risk of German financial institutions would have earned a mean return of about or even exceeding 70% of the corresponding total stock returns. iv) Returns of the interest rate risk benchmarks of the German insurance sector were significantly higher than those of German banks, which seems to contradict conventional market wisdom that insurances hedge interest rate risks.     

An Investment Management Methodology for Publicly Held Property/Casualty Insurers

Investment officers of publicly held property/casualty companies wrestle with the question of how best to contribute to shareholder value. Should they view themselves as managers of a closed‐end investment company that happens to be funded by insurance underwriting? Or should they instead be investing funds primarily to defease the firm's liabilities and thus support the operations of a company whose principal value derives from its insurance activities? The authors of this article suggest that the investment policy of most insurance companies should have two primary objectives: (1) immunizing insurance reserves with a fixed‐income portfolio and (2) earning “abnormal returns” on surplus in “a responsible and disciplined” way. The latter means adhering to an asset allocation approach that takes account of the risk‐reward tradeoffs presented by a broad variety of investment types as well as the accounting treatment of investment income. Both accounting and economic considerations lead the authors to suggest that after‐tax net investment income (“NII”), as defined by U.S. GAAP, is the best benchmark of performance. While focusing mainly on the fixed income part of the portfolio, the authors suggest active management and portfolio approaches that aim to produce a growing, but relatively stable NII. Consistent with GAAP's treatment of NII (which includes interest income but excludes most capital gains) as “recurring income,” the authors argue that the market appears to assign significantly higher multiples to NII than to other sources of reported income.     

Mutual fund characteristics, managerial attributes, and fund performance

This study provides a comprehensive examination of recent mutual fund performance by analyzing a large set of both mutual funds and fund attributes in an effort to link performance to fund-specific characteristics. The results indicate that the hypothesized relationships between performance and the explanatory variables are generally upheld. After taking into consideration general market conditions and fund investment objective, the characteristic variables that relate to fund popularity, growth, cost, and management also explain performance. Finally, after controlling for survivorship and benchmark error as well as fund-specific factors, the results refute the performance persistence phenomenon.     

Closed-End Fund Expenses and Investment Selection

Investment returns on closed‐end funds are highly volatile. Because expenses have a definite negative impact on closed‐end fund returns, investors should include the expense ratio as a criterion for fund selection in addition to performance, investment objective, and risk of the fund. This paper constructs a model of the expense ratio of closed‐end funds to explain cross‐sectional differences in the expense ratios for the period between 1989–1996. We relate closed‐end fund expenses to fund characteristics and identify the factors that can help investors choose low expense closed‐end funds.     

How to measure mutual fund performance: economic versus statistical relevance

In the present paper a comprehensive assessment of existing mutual fund performance models is presented. Using a survivor‐bias free database of all US mutual funds, we explore the added value of introducing extra variables such as size, book‐to‐market, momentum and a bond index. In addition to that we evaluate the use of introducing time‐variation in betas and alpha. The search for the most suitable model to measure mutual fund performance will be addressed along two lines. First, we are interested in the statistical significance of adding more factors to the single factor model. Second, we focus on the economic importance of more elaborate model specifications. The added value of the present study lies both in the step‐wise process of identifying relevant factors, and the use of a rich US mutual fund database that was recently released by the Center for Research in Security Prices.     

2012年1季度银行问市场运行报告

2012年1季度，银行间市场整体平稳运行，主要特点是：货币市场成交量同比大幅增长，季节性因素主导货币市场利率走势呈M型特征；银行间债券市场以震荡调整为主，总体呈现先抑后扬态势；人民币汇率弹性趋于增强，升值趋势进一步减§弓；Shibor对利率互换的基准作用增强；外汇衍生品市场保持快速增长，市场结构持续优化。     

中国的利率体系与利率市场化改革

利率对宏观经济均衡和资源配置有重要导向意义。央行确定政策利率要符合经济规律、宏观调控和跨周期设计需要。目前,中国的真实利率略低于经济增速,处于较为合理水平。中国已形成较为完整的市场化利率体系,主要通过货币政策工具调节银行体系流动性,释放政策利率调控信号,在利率走廊的辅助下,引导市场基准利率以政策利率为中枢运行,并通过银行体系传导至贷款利率,调节和优化资源配置,实现货币政策目标。中国具备继续实施正常货币政策的条件,将尽可能地延长正常货币政策的时间,目前不需要实施资产购买操作。在市场化利率体系中,收益率曲线非常重要,它反映利率由短及长的期限结构,可为各类金融产品和市场主体提供定价参考。收益率曲线的短端为货币市场基准利率,直接受央行货币政策操作的影响;长端则为国债收益率,主要反映市场对未来宏观经济走势的预期。经过多年发展,我国的国债收益率曲线应用日益广泛,整体趋于成熟,而在市场基础方面还有进一步提升的空间。     

How Informative Is Floating NAV When Securities Trade Infrequently?

We examine if a floating net asset value (NAV) increases the transparency of risk for investors. Using closed‐income fixed income funds we find little evidence that a floating NAV helps investors better understand the value and risk of a fund when a fund's assets trade infrequently. This potentially informs the debate regarding the adoption of a floating NAV in the money market industry. Our results suggest that it is unlikely that the benefits of floating NAV will outweigh the costs.