THE DIFFERENTIAL EFFECTS OF SINKING FUNDS ON BOND RISK PREMIA

This study analyzes the effect that two options created by the inclusion of a sinking fund clause in a bond indenture have on the bond issue's secondary market risk premium. The impact of market prices that exceed current sinking fund redemption prices, and of par versus premium redemption, is clearly apparent when a set of issue-specific and macroeconomic control variables are incorporated into a model of bond risk premia. Thus, secondary market prices for the large-volume utility bond transactions in the sample reflect knowledge of individual-issue, time-varying indenture characteristics.     

基于MSV与CoVaR模型的公司债市场与股票市场间风险溢出效应研究

依据2015—2017年中证公司债指数与沪深300指数的日收益数据,运用GC-t-MSV模型,检验中国公司债市场与股票市场间的风险溢出效应,并通过条件在险价值(CoVaR)模型度量两市场间风险溢出效应。结果表明：公司债市场与股票市场间存在不对称的双向风险溢出效应,且公司债市场对股票市场的风险溢出效应强于股票市场对公司债市场的风险溢出效应;公司债市场与股票市场的波动受其自身波动的影响较大,鉴此,监管部门和投资者应增强对公司债市场的关注,根据公司债市场的风险变化及时采取应对措施,充分发挥其风险信号作用。     

Convertible Bond Arbitrage: Risk and Return

Abstract:  This paper specifies a simulated convertible bond arbitrage portfolio to characterise the risks in convertible bond arbitrage. For comparison the risk profile of convertible bond arbitrage hedge fund indices at both monthly and daily frequencies is also examined. Results indicate that convertible bond arbitrage is positively related to default and term structure risk factors. These risk factors are augmented with the simulated convertible bond arbitrage portfolio, mimicking a passive investment in convertible bond arbitrage, to assess the risk and return of individual hedge funds. We provide estimates of the performance of two hedge fund indices (an equally weighted and value weighted index) and a sample of convertible bond arbitrage hedge funds using a factor model methodology. Lagged and contemporaneous observations of the risk factors are specified, controlling for illiquidity in the securities held by funds. Our results cover two time periods. Initially we find evidence of abnormal risk adjusted returns in the individual hedge fund data and the equally weighted hedge fund index and no evidence of abnormal risk adjusted returns in the value weighted hedge fund index. When we examine performance during the credit crisis of 2007 and 2008 we find evidence of negative abnormal returns amongst individual hedge funds and the hedge fund indices.     

Hard markets,hard times: On the inefficiency of the CAT bond market

This study explores the existence of inefficiencies in catastrophe (CAT) bond secondary markets by investigating the impact of sponsor characteristics on the CAT bond premium. We show that the CAT bond market does not satisfy the demand for catastrophe risk transfer efficiently by revealing a significant effect of sponsor-related factors on the CAT bond premium. This inefficiency is particularly surprising given that a CAT bond isolates the insured risk from other sponsor-related risks through a special purpose vehicle. Remarkably, this inefficiency is even present among non-indemnity CAT bonds, which determine the payout through a mechanism that is exogenous to the sponsor. Our findings also reveal that sponsor-related pricing inefficiencies vary over time and are more relevant during hard and neutral phases compared to soft market phases. Among the sponsor-related determinants of the CAT bond premium are the sponsor's tenure, market coverage, rating, credit default swap spread, and his ability to issue innovative “on the run” CAT bonds.     

The Bankruptcy Cost of the Life Insurance Industry Under Regulatory Forbearance

Abstract

In this study the Taiwan Insurance Guaranty Fund (TIGF) is introduced to investigate the ex ante assessment insurance guaranty scheme. We study the bankruptcy cost when a financially troubled life insurer is taken over by TIGF. The pricing formula of the fair premium of TIGF incorporating the regulatory forbearance is derived. The embedded Parisian option due to regulatory forbearance on fair premiums is investigated. The numerical results show that leverage ratio, asset volatility, grace period, and intervention criterion influence the default costs. Asset volatility has a significant effect on the default option, while leverage ratio is shown to aggravate the negative influence from the volatility of risky asset. Furthermore, the numerical analysis concludes that the premium for the insurance guaranty fund is risk sensitive and that a risk-based premium scheme could be implemented, hence, to ease the moral hazard.     

The relation between stock returns and short-term interest rates

This study examines the relation between the expected returns on common stocks and short-term interest rates. Using a two-factor model of stock returns, we show that the expected returns on common stocks are systematically related to the market risk and the interest-rate risk, which are estimated as the sensitivity of common-stock excess returns to the excess return on the equally weighted market index and to the federal fund premium, respectively. We find that the interest-rate risk for small firms is a significant source of investors' portfolio risk, but is not properly reflected in the single-factor market risk. We also find that the interest-rate risk for large firms is “negative” in the sense that the market risk estimated from the single-factor model overstates the true risk of large firms. An application of the Fama-MacBeth methodology indicates that the interest-rate risk premium as well as the market's risk premium are significant, implying that both the market risk and the interest-rate risk are priced. We show that the interest-rate risk premium explains a significant portion of the difference in expected returns between the top quintile and the bottom quintile of the NYSE and AMEX firms. We also show that the turn-of-the-year seasonal is observed for the interest-rate risk premium; however, the risk premium for the rest of the year is still significant, although small in mangitude.     

Industry regulation,fund characteristics,and the efficiency of Australian private health insurers

We examine the technical and scale efficiency of 30 Australian private health insurers during the period 2010–2017 using data envelopment analysis (DEA). We calculate industry pure technical efficiency of 91.6 percent and scale efficiency of 95.1 percent. We also employ a two‐stage DEA truncated bootstrapped regression to model efficiency on fund and policy factors. The results show that premium restrictions and risk equalisation policies, and fund characteristics like size, but not for‐profit/not‐for‐profit status, market share and leverage, exert significant effects. The findings suggest substantial scope for regulatory reform and structural change in the Australian private health insurance industry as a means of improving its efficiency.     

Implied volatility and future portfolio returns

Prior studies find that the CBOE volatility index (VIX) predicts returns on stock market indices, suggesting implied volatilities measured by VIX are a risk factor affecting security returns or an indicator of market inefficiency. We extend prior work in three important ways. First, we investigate the relationship between future returns and current implied volatility levels and innovations. Second, we examine portfolios sorted on book-to-market equity, size, and beta. Third, we control for the four Fama and French [Fama, E., French, K., 1993. Common risk factors in the returns on stocks and bonds. Journal of Financial Economics 33, 3–56.] and Carhart [Carhart, M., 1997. On persistence in mutual fund performance. Journal of Finance, 52, 57–82.] factors. We find that VIX-related variables have strong predictive ability.     

The performance of US bond mutual funds

We evaluate the performance of the US bond mutual fund industry using a comprehensive sample of bond funds over a long time period from January 1998 to February 2017. In this one study, we examine bond fund selectivity, market timing and performance persistence. We evaluate bond funds relative to their self-declared benchmarks and in terms of both gross-of-fee returns and net-of-fee returns. We document considerable abnormal performance among funds both to the fund (gross returns) and to the investor (net returns). Bond fund performance is found to be superior in the post financial crisis period. However, past strong performance cannot be relied upon to predict future performance. Finally, while some funds exhibit market timing ability; we find a predominance of negative market timing among US bond mutual funds.     

Dissecting hedge funds' strategies

This paper dissects the dynamics of the hedge fund industry with four financial markets, including the equity market, commodities, currencies, and debt market by employing a large number of assets from these markets. We employ four main representative hedge fund strategy indices, and a cap-weighted global index to estimate an asymmetric dynamic conditional correlation (ADCC) GJR-GARCH model using daily data from April 2003 to May 2021. We break down the performance, riskiness, investing style, volatility, dynamic correlations, and shock transmissions of each hedge fund strategy thoroughly. Further, the impact of commodity futures basis on hedge funds' return is analyzed. Comparing the dynamic correlations during the 2008 global financial crisis (GFC) with COVID-19 pandemic reveals changing patterns in hedge funds' investing styles. There are strong and pervasive shock spillovers from hedge fund industry to other financial markets, especially to futures commodities. An increase in the futures basis of several commodities drives up hedge funds' performance. While hedge fund industry underperforms compared to equity market and commodities, the risk-reward measures show that hedge funds are superior to other markets, and safer than the bond market.     

Implied liquidity risk premium in the term structure of sovereign credit default swap and bond spreads

In this study, we focus on the dynamic properties of the risk-neutral liquidity risk premium specific to the sovereign credit default swap (CDS) and bond markets. We show that liquidity risk has a non-trivial role and participates directly to the variation over time of the term structure of sovereign CDS and bond spreads for both the pre- and crisis periods. Secondly, our results indicate that the time-varying bond and CDS liquidity risk premium move in opposite directions which imply that when bond liquidity risk is high, CDS liquidity risk is low (and vice versa), which may in turn be consistent with the substitution effect between CDS and bond markets. Finally, our Granger causality analysis reveals that, although the magnitude of bond and CDS liquidity risk is substantially different, there is a strong liquidity flow between the CDS and the bond markets, however, no market seems to consistently lead the other.     

The intertemporal relationship between market return and variance: an Australian perspective

In this paper we investigate the intertemporal relationship between the market risk premium and its conditional variance in an Australian setting. Using a bivariate EGARCH‐M model combined with the dynamic conditional correlation (DCC) framework as proposed by Engle (2000), we find evidence of a positive relationship between the market risk premium and its variance and evidence of two distinct interest rate effects. Furthermore, while the bond market's own variance is not priced by investors, we find that the covariance between equity and bond markets is a significant risk factor that is priced in the market.     

凤尾变鸡头:被忽视的指数成分股交换

沪深300和中证500同时调整成分股,沪深300调出的股票大部分会进入中证500。这些交换的成分股既有沪深300调出效应,也有中证500调入效应。已有文献专注于沪深300调出样本整体的调出效应,却忽视了交换股还有中证500调入效应。本文首先使用断点回归设计研究交换股,证明了指数效应在国内存在。随后,使用Fama-French五因子模型研究交换股与其它沪深300调出股的差异,解释了为何国内研究认为指数效应不存在:交换股主要表现出调入效应,抵消了其它沪深300调出股的调出效应,忽视指数成分股交换导致了整体调出效应"不显著",甚至为正。     

A Model of Monetary Policy and Risk Premia

We develop a dynamic asset pricing model in which monetary policy affects the risk premium component of the cost of capital. Risk‐tolerant agents (banks) borrow from risk‐averse agents (i.e., take deposits) to fund levered investments. Leverage exposes banks to funding risk, which they insure by holding liquidity buffers. By changing the nominal rate the central bank influences the liquidity premium, and hence the cost of taking leverage. Lower nominal rates make liquidity cheaper and raise leverage, resulting in lower risk premia and higher asset prices, volatility, investment, and growth. We analyze forward guidance, a “Greenspan put,” and the yield curve.     

The skewness risk premium in equilibrium and stock return predictability

In this study, we investigate the skewness risk premium in the financial market under a general equilibrium setting. Extending the long-run risks (LRR) model proposed by Bansal and Yaron (J Financ 59:1481–1509, 2004) by introducing a stochastic jump intensity for jumps in the LRR factor and the variance of consumption growth rate, we provide an explicit representation for the skewness risk premium, as well as the volatility risk premium, in equilibrium. On the basis of the representation for the skewness risk premium, we propose a possible reason for the empirical facts of time-varying and negative risk-neutral skewness. Moreover, we also provide an equity risk premium representation of a linear factor pricing model with the variance and skewness risk premiums. The empirical results imply that the skewness risk premium, as well as the variance risk premium, has superior predictive power for future aggregate stock market index returns, which are consistent with the theoretical implication derived by our model. Compared with the variance risk premium, the results show that the skewness risk premium plays an independent and essential role for predicting the market index returns.     

Can hedging tell the full story? Reconciling differences in United States aggregate- and industry-level exchange rate risk premium

While the importance of currency movements to industry competitiveness is theoretically well established, there is little evidence that currency risk impacts US industries. Applying a conditional asset pricing model to 36 US industries, we find that all industries have a significant currency premium that adds about 2.47 percentage points to the cost of equity and accounts for approximately 11.7% of total risk premium in absolute value. Cross-industry variation in the currency premium is explained by foreign income, industry competitiveness, leverage, liquidity, and other industry characteristics, while its time variation is explained by US aggregate foreign trade, monetary policy, growth opportunities, and other macro variables. The results indicate that methodological weakness, not hedging, explains the insignificant industry currency risk premium found in previous work, thus resolving the puzzle that currency risk premium is important at the aggregate stock market level, but not at the industry level.     

The hedging effect of green bonds on carbon market risk

This paper explores effective hedging instruments for carbon market risk. Examining the relationship between the carbon futures returns and the returns of four major market indices, i.e., the VIX index, the commodity index, the energy index and the green bond index, we find that the connectedness between the carbon futures returns and the green bond index returns is the highest and this connectedness is extremely pronounced during the market's volatile period. Further, we develop and evaluate hedging strategies based on three dynamic hedge ratio models (DCC-APGARCH, DCC-T-GARCH, and DCC-GJR-GARCH models) and the constant hedge ratio model (OLS model). Empirical results show that among the four market indices the green bond index is the best hedge for carbon futures and performs well even in the crisis period. The paper also provides evidence that the dynamic hedge ratio models are superior to the OLS model in the volatile period as more sophisticated models can capture the dynamic correlation and volatility spillover between the carbon futures and market index returns.     

Closed-end country funds and U.S. market sentiment

Closed-end country funds can trade at large premiums and discountsfrom their foreign asset values (NAVs). Investigating this anomaly,we find that individual fund premiums move together, primarilybecause of the comovement of their stock prices with the U.S.market. Moreover, an index of country fund premiums differentiatessize-ranked U.S. portfolio returns and forecasts country fundstock returns. These findings suggest that international equityprices are affected by local risk. In particular, we show thatcountry fund premium movements reflect a U.S.-specific risk,which may be interpreted as U.S. market sentiment.     

Leverage and the Cross‐Section of Equity Returns

Building on theoretical asset pricing literature, we examine the role of market risk and the size, book‐to‐market (BTM), and volatility anomalies in the cross‐section of unlevered equity returns. Compared with levered (stock) returns, unlevered market beta plays a more important role in explaining the cross‐section of unlevered equity returns, even after controlling for size and BTM. The size effect is weakened, while the value premium and the volatility puzzle virtually disappear for unlevered returns. We show that leverage induces heteroskedasticity in returns. Unlevering returns removes this pattern, which is otherwise difficult to address by controlling for leverage in regressions.     

Cross-sectional analysis of Swedish stock returns with time-varying beta: the Swedish stock market 1983–96

This paper analyses the ability of beta and other factors, like firm size and book-to-market, to explain cross‐sectional variation in average stock returns on the Swedish stock market for the period 1983–96. We use a bivariate GARCH(1,1) process to estimate time-varying betas for asset returns. The estimated variances of these betas, derived from a Taylor series approximation, are used for correcting errors in variables. An extreme bound analysis is utilized for testing the sensitivity of the estimated coefficients to changes in the set of included explanatory variables.
Our results show that the estimated conditional beta is a more accurate measure of the true market beta than the beta estimated by OLS. The coefficient for beta is not significantly different from zero, while the variables book-to-market and leverage have significant coefficients, and the latter coefficients are also robust to model specification. Excluding the down turn 1990–92 from the sample shows that the significance of the risk premium for leverage might be considered as an industry effect during this extreme period. Finally, we find a close dependence between the risk premium for beta and that for size and book-to-market. The omission of each of these variables may cause statistical bias in the estimated coefficient for beta.