The political determinants of sovereign bond yield spreads

This paper analyzes the political determinants of sovereign bond yield spreads using data for 27 emerging markets in the period 1996 to 2009. I find strong evidence that countries with parliamentary systems (as opposed to presidential regimes) and a low quality of governance face higher sovereign yield spreads, while the degree of democracy and elections play no significant role. A higher degree of political stability and the power to implement austerity measures significantly reduce sovereign yield spreads particularly in autocratic regimes, while no significant effect is detected for democratic countries. Overall, political determinants have a more pronounced impact on sovereign bond yield spreads in autocratic and closed regimes than in democratic and open countries.     

The reaction of emerging market credit default swap spreads to sovereign credit rating changes

This paper examines the effect of sovereign credit rating change announcements on the CDS spreads of the event countries, and their spillover effects on other emerging economies’ CDS premiums. We find that positive events have a greater impact on CDS markets in the two-day period surrounding the event, and are more likely to spill over to other emerging countries. Alternatively, CDS markets anticipate negative events, and previous changes in CDS premiums can be used to estimate the probability of a negative credit event. The transmission mechanisms for positive events are the common creditor and competition in trade markets.     

Distress risk,product market competition,and corporate bond yield spreads

Review of Quantitative Finance and Accounting - The purpose of this paper is to examine whether industry-level risk affects corporate bond yield spreads. We use three types of industry risk...     

Internal liquidity risk in corporate bond yield spreads

The recent global financial crisis reveals the important role of internal liquidity risk in corporate credit risk. However, few existing studies investigate its effects on bond yield spreads. Panel data for the period from year 1993 through 2008 show that corporate internal liquidity risk significantly impacts bond yield spreads (and changes) when controlling for well-known bond yield determinant variables, traditional accounting measures of corporate debt servicing ability, cash flow volatility, credit ratings, and state variables. This finding indicates that internal liquidity risk should therefore be incorporated into bond yield spread modeling.     

The market timing of corporate bond reopenings

The objective of this paper is to test whether companies use corporate bond reopenings to exploit overvalued debt. Reopenings represent new debt offerings, which are characterized through identical configurations as an already outstanding bond, but with a market-adjusted price. Their advantage lies with the fact that fewer preparations are required compared to a new regular offering. For a set of European companies our results suggest that stockholders respond less positively to the announcements of reopenings than to regular offerings. This effect is stronger, the higher the pre-issue bond price run-up, and the stock price reaction is directly linked to the change in the firm’s debt value. Additionally, the prices of the reopened bonds drop on the announcement day. Therefore, in line with the window of opportunity theory, the firm’s management appears to use reopenings as a fast and inexpensive way to raise debt capital, which leads stockholders and bondholders to suspect an overvaluation and therefore to adjust their price expectations. The analysis also reveals that the redistribution of wealth from bondholders to stockholders is a major determinant for the observed price changes.     

Information uncertainty,information asymmetry and corporate bond yield spreads

This study examines the effects of information uncertainty and information asymmetry on corporate bond yield spreads using American data from 2001 to 2006. Empirical results of this study show that investors charge a significant risk premium for both information uncertainty and information asymmetry when controlling for variables well known in the literature. The results are robust even when controlling for credit ratings. Finally, information uncertainty and asymmetry help structural-form credit models explain the yield spreads of bonds with short maturities.     

Yield spreads,agency costs and the corporate bond call feature

This paper theoretically compares yields and optimal default policies for callable and non-callable corporate debt. It shows that, contrary to the conventional wisdom, it is possible for the yield spread (callable minus non-callable) to be negative. It also identifies the key determinants of the yield spread. Next, it shows that the optimal default trigger for non-callable debt is higher than the trigger for callable debt, resulting in additional default-related costs. Thus, the use of non-callable debt gives rise to an indirect agency cost of early default, which is the difference in total firm value with callable and non-callable debt. This agency cost provides a rationale for the existence of callable debt. By examining the determinants of the magnitude of this agency cost, the conditions that make callable debt more attractive (to the issuing firm) relative to non-callable debt are identified. This allows certain predictions to be made regarding the likelihood of a call feature in a corporate bond. The model's implications are supported by existing empirical studies.     

Dynamic effects of idiosyncratic volatility and liquidity on corporate bond spreads

We study the dynamic impact of idiosyncratic volatility and bond liquidity on corporate bond spreads over time and empirically disentangle both effects. Using an extensive data set, we find that both idiosyncratic volatility and liquidity are critical mainly for the distress portfolios, i.e., low-rated and short-term bonds; for others only volatility matters. The effects of volatility and liquidity shocks on bond spreads were both exacerbated during the recent financial crisis. Liquidity shocks are quickly absorbed into bonds prices; however, volatility shocks are more persistent and have a long-term effect. Our results overall suggest significant differences between how volatility and liquidity dynamically impact bond spreads.     

Macroeconomic risks of supply chain counterparties and corporate bond yield spreads

The domino phenomenon that corporate failures occur along supply chain during the recent financial tsunami shows the important effects of the systematic risk of a firm’s supply chain counterparties on its credit risk (or bond yield spreads). It motivates this research to investigate the effects of supply chain counterparties’ macroeconomic risks on corporate bond yield spreads by employing 10,022 American bond observations from 1997 to 2008. The empirical results show that the macroeconomic risks of a firm and its customers are significantly and positively related to the firm’s bond yield spreads while those of suppliers have insignificant effects.     

Creditor rights and the corporate bond market

This study examines whether investor protection affects capital markets, specifically the development of corporate bond markets versus equity markets. Using a dataset of 42 countries, we show that countries with strong creditor rights have more developed corporate bond markets than equity markets. However, we find only weak evidence that countries with stronger shareholder protection have more developed equity markets than corporate bond markets. Additionally, we find that the effect of financial reforms on capital markets is strongly dependent on the strength of investor protection and on the associated information disclosure in a given country.     

Suppliers’ and customers’ information asymmetry and corporate bond yield spreads

This study investigates the information asymmetry effects of suppliers and customers on a firm’s bond yield spreads by employing American bond market data from 2001 to 2008. This study finds that both suppliers’ and customers’ information asymmetry effects significantly explain a firm’s bond yield spreads. Besides, the information asymmetry effects of more important suppliers and customers are more significant than those of less important ones. The results are robust even after controlling for other well-known firm specific and economic variables.     

韩国公司债市场及其对我国的启示

韩国早期的金融环境与我国相比有一些相似之处。该文分析了韩国公司债市场的发展历程和当前的现状，并结合我国实际为我国公司债券市场发展提出了相关建议。     

Trade and information in the corporate bond market

This paper examines the impact of shifting liquidity and institutional trading in the corporate bond market on inferences regarding informational efficiency. We find that when institutional trade dominance and other bond trading features are accounted for, stock leads evidenced in earlier studies surprisingly disappear. Short windows after firm-specific news releases are examined, and bond trading advantages are shown to be pronounced particularly when equity market liquidity is low (during after-market hours). Cross-sectionally, the effect of credit risk and other firm/bond level characteristics are determined. Finally, ‘top bonds’ are identified, and their common ex ante identifiable characteristics are determined.     

Unconventional monetary policies and the corporate bond market

The paper uses a reduced-form vector autoregressive framework to study the effects of quantitative easing and operation “twist”, as well as a conventional monetary expansion, on corporate bond yields and spreads. We construct rating- and maturity-based weekly bond portfolios using TRACE and simulate monetary policies as shocks to the Treasury yield curve. We find that none of the policies can persistently lower corporate spreads, and that operation twist is the only policy capable of lowering corporate yields. This latter finding can be accounted for by the operation twist’s ability to keep the monetary base constant and, therefore, to flatten the riskless yield curve without generating inflationary expectations.     

Long-term reversals in the corporate bond market

Long-term reversals in corporate bonds are economically and statistically significant in a comprehensive sample spanning the period 1977 to 2017. Such reversals are stronger for bonds with high credit risk and more binding regulatory, capital, and funding liquidity constraints. Bond long-term reversal is not a manifestation of the equity counterpart and is mainly driven by long-term losers. A long-term reversal factor carries a sizable premium and is not explained by long-established equity and bond market factors. Thus, past returns capture investors’ ex-ante risk assessment and the degree of institutional constraints they face, so losing bonds command higher expected returns.     

A macro-financial analysis of the euro area sovereign bond market

We estimate the ‘fundamental’ component of euro area sovereign bond yield spreads, i.e. the part of bond spreads that can be justified by country-specific economic factors, euro area economic fundamentals, and international influences. The yield spread decomposition is achieved using a multi-market, no-arbitrage affine term structure model with a unique pricing kernel. More specifically, we use the canonical representation proposed by Joslin et al. (2011) and introduce next to standard spanned factors a set of unspanned macro factors, as in Joslin et al. (forthcoming). The model is applied to yield curve data from Belgium, France, Germany, Italy, and Spain over the period 2005–2013. Overall, our results show that economic fundamentals are the dominant drivers behind sovereign bond spreads. Nevertheless, shocks unrelated to the fundamental component of the spread have played an important role in the dynamics of bond spreads since the intensification of the sovereign debt crisis in the summer of 2011.     

What causes mean reversion in corporate bond index spreads? The impact of survival

Previous studies document that the spread between the yield on commonly used corporate bond indexes (e.g., Moody’s Baa index) and a comparable maturity treasury bond exhibits mean reversion. An analytical model shows that a part of the observed negative relationship between changes in the spread and the level of spreads is a natural consequence of ratings based classification of bonds included in the index and the related effects of survival. Using data on individual corporate bonds over the period January 1985 to December 1996, I corroborate the analysis and illustrate the effects of survival. The result has several implications for parametric specifications of spread dynamics in the pricing of contingent claims, for the application of spreads in tests of asset pricing models (such as the conditional version of the CAPM) and for the use of spreads in business cycle forecasts.     

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 Greek financial crisis: Growing imbalances and sovereign spreads

We discuss the origins of the Greek financial crisis as manifested in the growing fiscal and current-account deficits since euro-area entry in 2001. We then extend a model typically used to explain risk premia to assess the extent to which credit ratings captured these premia. Next, we estimate a cointegrating relationship between spreads and their long-term fundamental determinants and compare the spreads predicted by this estimated relationship with actual spreads. We find that spreads were significantly below what would be predicted by fundamentals from end-2004 up to the middle of 2005; by contrast, since May 2010, actual spreads have exceeded predicted spreads by some 400 basis points.     

Oil price shocks and volatility spillovers in the Nigerian sovereign bond market

This paper investigates volatility spillover in the Nigerian sovereign bond market arising from oil price shocks, using Vector Autoregressive Moving Average ‐ Asymmetric Generalized Autoregressive Conditional Heteroscedasticity (VARMA‐AGARCH) model. The paper covers the period March 22, 2011 to April 14, 2016 and makes use of the daily data of the Nigerian Sovereign Bond, Brent oil and West Texas Intermediate (WTI), respectively. We endogenously and sequentially detect structural break points using the test of Bai and Perron (2003) framework. In order to accurately estimate the model, we modify it by incorporating the break points into the VARMA‐AGARCH model, a process which if ignored would lead to model misspecification. The results obtained demonstrate a significant cross‐market volatility transmission between oil and sovereign bond market with ample sensitivity to structural breaks. The study also computes optimum weight portfolio and hedge ratio both with and without structural breaks and results equally indicate sensitivity to structural breaks.