The issuance of callable bonds under information asymmetry

We reconsider the role of asymmetric information in motivating the issuance of callable bonds. The previous literature has emphasized a possibility that a call feature serves as a signal of issuer quality. We demonstrate that asymmetric information can motivate use of a call even when this action does not signal quality in equilibrium. We construct a matched sample of callable and non-callable bonds that permits us to control for non-informational effects on the call issuance decision. Empirical evidence from speculative grade bond markets is consistent with the hypotheses that asymmetric information motivates use of the call feature, but there is no evidence that inclusion of the call functions as a signal to the market.     

Effective duration of callable corporate bonds: Theory and evidence

This paper computes the effective duration of callable corporate bonds, using a contingent-claims model that incorporates both default risk and call risk. The model generates empirical implications regarding the cross-sectional variation and the firm-specific determinants of duration, and demonstrates that the effect of the call feature is to shorten duration (except for low-grade bonds). The effective duration is also estimated empirically for a large sample of long-term corporate bonds, using monthly bond price and interest rate data. Cross-sectional regression analysis is used to test the empirical implications of the model regarding the determinants of effective duration, and the empirical results are quite supportive of the model’s predictions.     

Term structure estimation and pricing of callable Treasury bonds

This article describes a methodology of term structure estimation incorporating callable Treasury bonds using a bond-option valuation model. This article also examines whether some simple approximation of the option value suffice for providing a useful estimation procedure. The authors find that the errors in estimating the option value can generate significant errors for estimating the discount function. A call provision on a Treasury bond is not negligible at least our framework. This procedure is consistent with two aspects of the Treasury market. First, it provides the discount function that best determines the prices of observed Treasury securities, and second, it obtains a discount function that explains callable Treasuries.     

Why firms issue callable bonds: Hedging investment uncertainty

This paper analyzes a firm's dynamic decisions: i) whether to issue a callable or non-callable bond; ii) when to call the callable bond; and iii) whether to refund it when it is called. We argue that a firm uses a callable bond to reduce the risk-shifting problem in case its investment opportunities become poor. Our empirical findings support this argument. We find that a firm facing poorer future investment opportunities is more likely to issue a callable bond than a firm facing better investment opportunities. In addition, a firm with a higher leverage ratio and higher investment risk is more likely to issue a callable bond. Finally, after a callable bond is issued, a firm with a poor performance and a low investment activity tends to call back a bond without refunding; a firm with the best performance and highest investment activity tends to call back a bond and refund its call; and a firm with mediocre performance and investment activity tends to not call its bonds.     

Reduced-form valuation of callable corporate bonds: Theory and evidence

We develop a reduced-form approach for valuing callable corporate bonds by characterizing the call probability via an intensity process. Asymmetric information and market frictions justify the existence of a call-arrival intensity from the market's perspective. Our approach both extends the reduced-form model of Duffie and Singleton (1999) for defaultable bonds to callable bonds and captures some important differences between call and default decisions. A comprehensive empirical analysis of callable bonds using both our model and the more traditional American option approach for valuing callable bonds shows that the reduced-form model fits callable bond prices well and that it outperforms the traditional approach both in- and out-of-sample.     

American options and callable bonds under stochastic interest rates and endogenous bankruptcy

A new characterization of the American-style option is proposed under a very general multifactor Markovian and diffusion framework. The efficiency of the proposed pricing solutions is shown to depend only on the use of a viable valuation method for the corresponding European-style option and for the transition density of the model’s state variables. Under a Gauss-Markov stochastic interest rates setup, these new American option pricing solutions are shown to offer a much better accuracy-efficiency trade-off than the approximations already available in the literature. This result is also used to price callable corporate bonds under an endogenous bankruptcy structural approach, by decomposing the option to call or default into a European put on the firm value plus two early exercise premium components.     

Dynamic capital structure with callable debt and debt renegotiations

We consider a dynamic trade-off model of a firm's capital structure with debt renegotiation. Debt holders only accept restructuring offers from equity holders backed by threats which are in the equity holders' own interest to execute. Our model shows that in a complete information model in which taxes and bankruptcy costs are the only frictions, violations of the absolute priority rule (APR) are typically optimal. The size of the bankruptcy costs and the equity holders' bargaining power affect the size of APR violations, but they have only a minor impact on the choice of capital structure.     

Home Equity,Household Savings and Consumption

The home-owning family’s equity is a piggybank that can be broken open by borrowing. Each borrowing increases liabilities and cash equally, initially leaving net wealth unchanged. When those funds are spent and cash balances fall, consumption increases even as net wealth can decline. In a dynamic optimization, the marginal propensity to consume from net wealth is not always positive and can be positively correlated with housing debt.

Pension Funding,Share Prices,and National Savings

This paper examines empirically the effect of unfunded pension obligations on corporate share prices and discusses the implications of these estimates for national saving, the decline of the stock market in recent years, and the rationality of corporate financial behavior. The analysis uses the information on inflation-adjusted income and assets which large firms were required to provide for 1976 and subsequent years. The evidence for a sample of nearly 200 manufacturing firms is consistent with the conclusion that share prices fully reflect the value of unfunded pension obligations. Since the conventional accounting measure of the unfunded pension liability has a number of problems (which we examine in the paper), it would be more accurate to say that the data are consistent with the conclusion that shareholders accept the conventional measure as the best available information and reduce share prices by a corresponding amount. The most important implication of the share price response is that the existence of unfunded private pension liabilities does not necessarily entail a reduction in total private saving. Because the pension liability reduces the equity value of the firm, shareholders are given notice of its existence and an incentive to save more themselves. For this reason, unfunded private pensions differ fundamentally from the unfunded Social Security pension and the other unfunded federal government civilian and military pensions.     

The Spirit of Capitalism, Precautionary Savings, and Consumption

Recent research has shown that the "spirit of capitalism"—a preference for wealth itself, in addition to consumption—has important implications for growth and asset pricing. This paper explores how the spirit of capitalism affects saving and consumption behavior. We demonstrate that the spirit of capitalism may reduce the importance of precautionary savings. It can also explain the excess sensitivity puzzle: the spirit of capitalism causes dramatic deviations from a random walk. It may also offer a partial explanation of the excess smoothness puzzle.     

储蓄与储蓄缺口--对发展经济学教科书"储蓄缺口"判断标准的质疑

在标准的发展经济学教科书中，一般都将I—S缺口作为判断储蓄缺口是否存在的依据。本文从国民经济核算的角度对此提出疑义，认为此标准与较早对储蓄缺口问题进行系统研究的先行者罗森斯坦——罗丹的解释不符。按照对储蓄含义的剖析，在资本自由流动的今天，I-S缺口并不能完全反映一国真实的储蓄供求状况，而中国在此基础上所兼有的巨额存差和银行呆坏帐则表明，中国经济发展面临的约束条件已经由储蓄不足演变为储蓄过剩。     

Transparency,idiosyncratic risk,and convertible bonds

We first investigate the relationship among a company's information transparency, idiosyncratic risk, and return of its convertible bonds. The effects of a company's idiosyncratic risk on its equity's value volatility and its credit risk are also examined. The findings indicate that when a company discloses a significant amount of information, it is likely to have a higher idiosyncratic risk and a lower credit risk, with no impact on returns on convertible bonds. The volatility of stock returns is positively related to returns on convertible bonds, and it is found that diversified strategies and returns on a company's equity help to improve its credit rating and that a better credit rating triggers an increase in returns on convertible bonds and idiosyncratic risk, indicating that evaluations of the value of convertible bonds must take pure bonds and equity (option) values into account. After excluding conversion values and estimating the idiosyncratic risk on daily, weekly, and monthly bases, this study suggests that there is a positive relation between returns on convertible bonds and information transparency when estimating idiosyncratic risk on a monthly basis and that a positive association also exists between credit rating, idiosyncratic risk, and returns on bonds.     

Public debt,bailouts, and common bonds

We look at a model where countries of different sizes provide local public goods with positive spillovers. Matching grants can give rise to optimal expenditure levels, but countries can induce bailouts. We study the characteristics of these bailouts in a subgame-perfect Nash equilibrium and how these characteristics are affected by the introduction of common bonds. Partial substitution of common for sovereign bonds has two implications. First, it lowers the average and marginal borrowing costs of countries which may be eligible for bailouts. This effect leads to higher borrowing in these countries irrespective of their bailout expectations. Second, the lower borrowing costs mitigate the incentives of countries to induce a bailout and, therefore, constrain the parameter set for which a soft budget constraint equilibrium exists. As a result, the introduction of common bonds can also be in the interest of those countries that provide the bailouts.     

Household Savings,the Stock Market,and Economic Growth in China

Africa's export performance has been extremely poor in recent years. Its share of world exports has declined and most countries are highly dependent on a narrow range of primary commodities for export earnings. This paper looks at factors that affect the export performance of manufacturing enterprises in eight African countries. In addition to enterprise characteristics (e.g., size, ownership, and education of the manager), policy-related variables also affect exporting. Manufacturing enterprises are less likely to export in countries with restrictive trade and customs regulations and poor customs administration.     

Reinforcement Learning and Savings Behavior

We show that individual investors over‐extrapolate from their personal experience when making savings decisions. Investors who experience particularly rewarding outcomes from 401(k) saving—a high average and/or low variance return—increase their 401(k) savings rate more than investors who have less rewarding experiences. This finding is not driven by aggregate time‐series shocks, income effects, rational learning about investing skill, investor fixed effects, or time‐varying investor‐level heterogeneity that is correlated with portfolio allocations to stock, bond, and cash asset classes. We discuss implications for the equity premium puzzle and interventions aimed at improving household financial outcomes.     

流动性滞存与通货紧缩

通货紧缩是近年来困扰我国经济的一个难题。本提出流动性滞存原理，用来解释我国的通货紧缩现象，对该原理与此前有关原理的承继和发展关系，以及有关的方法论问题进行了尝试性的研究，并依此原理提出缓解我国通货紧缩的方法。     

Migrants' Savings, Purchasing Power Parity, and the Optimal Duration of Migration

If some of the returns to migration accrue from returnmigration, the optimal duration of migration may be shorter thanthe feasible duration of migration. We develop a model that providesand highlights conditions under which return migration takesplace even though a reversal of the inter-country wage differentialdoes not occur. In particular, we consider the higher purchasingpower of savings (generated from work abroad) at home than abroadas a motive for return migration. Inter alia, our model producesa negative relationship between the optimal duration of migrationand the purchasing power differential and in some (but not all)cases, a negative relationship between the optimal duration ofmigration and the wage abroad. In addition, and contrary to ourprior anticipation, our utility maximization analysis suggeststhat East-West migration will tend to be temporary while inter-EuropeanCommunity (or intra-West European) migration will likely be permanent.