Using Corporate Inflation Protected Securities to Hedge Interest Rate Risk

In the first half of 2008, rising inflation became a concern, but by the fall the focus was on deflation. Such shifts in the outlook for inflation represent a significant risk for some companies, particularly those whose revenues and profits are negatively affected by increases in inflation and rates. For such companies, the use of long‐term fixed‐rate debt will provide at least a partial hedge against increased rates. Less widely appreciated is that even companies whose profits move up and down with inflation face considerable risk from fluctuations in interest rates. Conventional wisdom holds that floating‐rate debt hedges this risk. But this article argues that floating‐rate debt still leaves a company exposed to increases in real interest rates. Inflation‐sensitive companies such as utilities can use corporate inflation‐protected securities (CIPS) to hedge their real interest rate risk as well as inflation risk. In addition to its hedging benefits, CIPS also have the potential to reduce borrowing costs by satisfying growing investor demand for high‐quality securities that provide inflation protection (including demand sources like the recent restoration of French savings accounts to inflation).     

Litigation and mutual-fund runs

We investigate whether anticipation of adverse events (litigation about market timing and late trading) may trigger mutual-fund runs. We find that runs start as early as three months prior to litigation announcements. Pre-litigation runs accumulate to 31 basis points of the total net assets over a three-month window; post-litigation runs may last more than six months and accumulate to 1.25 percent over the first three-month window. Additionally, investors who run before litigation announcements earn significantly higher risk-adjusted and peer-adjusted returns than those who run after litigation. The difference in returns is particularly pronounced for funds holding illiquid assets. Finally, securities held by litigated fund families significantly underperform vis-á-vis other securities in terms of lower abnormal returns and liquidity. Our analysis suggests that a pro-rata ownership design is insufficient to prevent mutual-fund runs.     

Are expectations of inflation rational? or Is variation of the expected real interest rate unpredictable?

The joint hypothesis developed and tested in this paper is that the nominal interest rate is a rational expectation of the real interest rate plus the inflation rate and that variation of the expected real interest rate is unpredictable on the basis of information used in the test. This test is applied to quarterly data on three-month United States Treasury bills of 1954 to 1973. The information used in the tests includes, besides past interest rates and inflation rates, past growth rates of the source base, the money supply, and real GNP. Some of the tests allow for a positive marginal tax rate, which changes the results little. The hypothesis is generally consistent with the data, which provides support for the proposition that predictable changes of the money supply do not affect expected real interest rates over periods as short as a quarter.     

Inflation Accounting Disclosures and Stock Price Adjustments: Some Canadian Results

This article tests for an association between security returns and anticipated and unanticipated inflation. Inflation accounting disclosures are used to group securities on the basis of their sensitivity to inflation. Nominal security returns and residual returns are independently regressed on the levels of anticipated and unanticipated inflation using a dummy variable model. Results support previous U.S. findings that investors do not seem to use these accounting disclosures in the selection of securities. The evidence indicates, however, that for firms “less affected” by inflation, there exists an association between residual returns and anticipated inflation.     

The ex ante real rate and inflation premium under a habit consumption model

This paper analyzes and quantifies ex ante components of bond yields – real rate of returns and risk premiums – from observed prices of nominal and indexed bonds in the United Kingdom from 1983 to 2000. The estimation uses an asset pricing framework based on a habit consumption model together with a joint formulation of consumption growth and inflation. Nominal yields carry a time-varying inflation premium that is significant throughout the period, increasing in the bond's maturity and contributing up to 25 basis points to yearly nominal yields. The analysis allows the extraction of the ex ante real rate from indexed bonds by properly taking into account both the incomplete indexation on these instruments and the inflation premium embedded in the nominal bonds.     

INFLATION,SECURITY VALUES,AND RISK PREMIA

The impact of stochastic inflation on the cross-sectional structure of nominal securities yields is examined. The analysis indicates that equilibrium required returns on debt and equity securities are affected differently by inflation and that the “Fisher Effect” is more likely to hold for equity returns than for debt yields. Implications for empirical investigations of portfolio performance and the real interest rate are explored.     

Treasury Safety,Liquidity, and Money Premium Dynamics: Evidence from Debt Limit Impasses

Treasury securities enjoy a “money premium” because they are ultra-safe and liquid. However, during debt limit impasses, the safety and liquidity of Treasury securities temporarily deteriorate, eroding the money premium. Using past impasses, we find the money premium eroded by roughly six basis points across all Treasury securities and up to 50 basis points for the shortest maturities at the greatest risk of a delayed principal payment. Safety and liquidity each accounted for about half of the erosion. The deterioration of safety and liquidity also appears to interact, consistent with theories of default-driven liquidity risk and the information sensitivity of debt.     

International asset pricing under segmentation and PPP deviations

We analyze the impact of both purchasing power parity (PPP) deviations and market segmentation on asset pricing and investor's portfolio holdings. The freely traded securities command a world market risk premium and an inflation risk premium. The securities that can be held by only a subset of investors command two additional premiums: a conditional market risk premium and a segflation risk premium. Our model is empirically supported with important implications for tests of international asset pricing.     

Inflation risk premia and the expectations hypothesis

We study the properties of the nominal and real risk premia of the term structure of interest rates. We develop and solve the bond pricing implications of a structural monetary version of a real business cycle model, with taxes and endogenous monetary policy. We show the relation of this model with the class of essentially affine models that incorporate an endogenous state-dependent market price of risk. We characterize and estimate the inflation risk premium and find that over the last 40 years the ten-year inflation risk premium has been has averaged 70 basis points. It is time-varying, ranging from 20 to 140 basis points over the business cycle and its term structure is sharply upward sloping. The inflation risk premium explains 23% (42%) of the time variation in the five (ten)-year forward risk premium and it plays an important role in help explain deviations from the expectations hypothesis of interest rates.     

基于贝叶斯网络的上市证券公司风险预警模型研究

上市证券公司的风险预警模型能够为政府监管、证券公司稳健发展以及投资者研判提供依据。以上市证券公司风险管理指标体系为基础,利用贝叶斯网络方法以及支持向量机、随机森林和多项Logit模型分别建立风险预警模型进行比较,并在实证中针对上市证券公司的不平衡数据特征,用 SMOTE抽样对数据进行预处理。最终实证表明：从平均准确率和标准差两个角度比较,SOMTE抽样增加了贝叶斯网络的预测效果,机器学习方法要优于多项Logit模型,贝叶斯网络方法效果最佳。     

Value Creation through Securitization: Evidence from the CMBS Market

Despite recent volatility and constraints in secondary market funding, analysts have ascribed substantial value creation to the securitization of commercial mortgages. Such value creation likely emanates from liquidity enhancements, regulatory arbitrage, price discrimination and risk diversification by pooling and tranching, gains from specialization in origination, servicing, and holding of mortgages, and the like. Indeed, such value creation would be consistent with past accelerated growth in the mortgage- and asset-based securities markets and the sizable profits earned by secondary market intermediaries. In this paper, we estimate the pricing effects of commercial mortgage securitization. We do so by applying loan level data from 1992–2003 to compare the pricing of conduit and portfolio loans held in CMBS structures. In contrast to portfolio loans, which are held for investment by originating institutions, conduit loans are originated for the sole purpose of sale and securitization in the secondary market. If securitization creates value, it should be evidenced in the relative pricing of conduit loans sold into CMBS pools and in a lower cost of capital to loan originators. We estimate a reduced-form model, in which the interest rate spread between commercial mortgages and comparable-maturity treasury securities varies with loan characteristics, capital market conditions, and conduit loan status. Estimation results indicate that securitization of conduit loans leads to an 11 basis points reduction in commercial mortgage interest rates. We assess robustness of results via hazard model tests for omitted variables and originator-specific effects. We further estimate a simultaneous equations model that accounts for the potential endogeneity of mortgage loan terms to the mortgage-treasury rate spread. Results of that analysis suggest a larger 20 basis points reduction in loan pricing among conduit loans sold into CMBS structures.     

Tests of conditional asset pricing models in the Brazilian stock market

In this paper, we test a version of the conditional CAPM with respect to a local market portfolio, proxied by the Brazilian stock index during the period 1976–1992. We also test a conditional APT model by using the difference between the 30-day rate (Cdb) and the overnight rate as a second factor in addition to the market portfolio in order to capture the large inflation risk present during this period. The conditional CAPM and APT models are estimated by the Generalized Method of Moments (GMM) and tested on a set of size portfolios created from individual securities exchanged on the Brazilian markets. The inclusion of this second factor proves to be important for the appropriate pricing of the portfolios.     

Credit ratings and structured finance

The poor performance of credit ratings of structured finance products in the financial crisis has prompted investigation into the role of credit rating agencies (CRAs) in designing and marketing these products. We analyze a two-period reputation model in which a CRA both designs and rates securities that are sold both to investors who are constrained to purchase highly rated securities and investors who are unconstrained. Assets are pooled and senior and junior tranches are issued with a waterfall structure. When the rating constraint is lax, the CRA will include only risky assets in the securitization pool, serving both types of investors without any rating inflation. Rating inflation is decreasing in the tightness of the rating constraint locally. But rating inflation may be non-monotonic in the rating constraint globally, with no rating inflation when the constraint is lax or tight.     

国外券商自营业务风险控制及对我国券商的启示

风险控制是证券自营业务风险管理的核心环节,是证券公司自营业务风险管理的关键所在。国外券商在自营业务风险控制方面各具特色且个性鲜明。在对国外著名券商自营业务风险控制分析的基础上,比较了国内券商与国外券商自营业务风险控制的差距。国外券商已经逐步形成一整套比较成热、完善的自营业务风险控制系统,对于我国证券公司自营业务风险控制改进有借鉴意义。     

Does mortality improvement increase equity risk premiums? A risk perception perspective

Using data for G7 countries over the period from 1950 to 2007, this paper finds that an unexpected shock to the mortality rate is significantly negatively correlated with the equity premium. A one basis point unexpected negative shock to the mortality rate increases both the one-year and five-year equity premiums by 0.54% and 1.66%, respectively. We also demonstrate how financial institutions could use our findings to hedge the risk of mortality-linked securities.     

中国持有美国国债的动因、影响与应变之策

标普下调美国主权信用评级引发全球关于美国国债投资风险的热议,作为美国国债最大的海外官方持有者,我国亦需要加强应对美国国债问题的研究。文章回顾了中国购买美国国债的发展历程,分析了近年来中国加快增持美国国债的成因,在衡量中国持有美国国债的风险与收益的基础上,就控制和规避美国国债风险提出相关政策建议。     

Inflation Expectations and Risk Premiums in an Arbitrage‐Free Model of Nominal and Real Bond Yields

Differences between yields on comparable‐maturity U.S. Treasury nominal and real debt, the so‐called breakeven inflation (BEI) rates, are widely used indicators of inflation expectations. However, better measures of inflation expectations could be obtained by subtracting inflation risk premiums (IRP) from the BEI rates. We provide such decompositions using an affine arbitrage‐free model of the term structure that captures the pricing of both nominal and real Treasury securities. Our empirical results suggest that long‐term inflation expectations have been well anchored over the past few years, and IRP, although volatile, have been close to zero on average.     

Inflation Risk in Corporate Bonds

We argue that corporate bond yields reflect fears of debt deflation. When debt is nominal, unexpectedly low inflation increases real liabilities and default risk. In a real business cycle model with optimal but infrequent capital structure choice, more uncertain or procyclical inflation leads to quantitatively important increases in corporate log yields in excess of default‐free log yields. A panel of credit spread indexes from six developed countries shows that credit spreads rise by 14 basis points if inflation volatility or the inflation‐stock correlation increases by one standard deviation.     

Unexpected inflation and bank stock returns: The case of France 1977–1991

This paper evaluates the impact of unexpected inflation on the stock returns of a sample of French banks. It offers an empirical test of theories that have predicted an impact of inflation on the stock returns of banks. The paper complements a large literature that has focused exclusively on the impact of unexpected interest rates. The analysis provides empirical support to the hypothesis that, in periods of volatile inflation, there exists an inflation risk factor which is independent of the well-documented interest rate factor.     

Fiscal Consequences of Paying Interest on Reserves

We review the role of the central bank's balance sheet in a textbook monetary model and explore what changes if the central bank is allowed to pay interest on its liabilities. When the central bank (CB) cannot pay interest, away from the zero lower bound its (real) balance sheet is limited by the demand for money. Furthermore, if securities are not marked to market and the central bank holds its bonds to maturity, it is impossible for the CB to make losses, and it always obtains profits from being a monopoly provider of money. When the option of paying interest on liabilities is allowed, the limit on the CB's balance sheet is lifted. In this case, the CB is free to take on interest‐rate risk – for example, by buying long‐term securities and financing those purchases with short‐term debt that pays the market interest rate. This is a risky enterprise that can lead to additional profits but also to losses. To the extent that losses exceed the profits of the monopoly operations, the CB faces two options: either it is recapitalised by Treasury or it increases its monopoly profits by raising the inflation tax.