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Publications (93)
This paper investigates the effect of policy uncertainty on offering yield spreads using a comprehensive corporate bond issuing dataset. Empirical evidence shows a significant positive impact of policy uncertainty on offering yield spreads of bonds. This effect is more substantial for firms with higher exposure to tax policy, greater dependence on...
We propose a dynamic equilibrium model with stochastic interest rates in which agents hold heterogeneous valuations for the same asset and take on positions against each other. The model shows that interest rate uncertainty and investor heterogeneity are key determinants of price dispersion. Higher search intensity reduces price dispersion, while r...
We propose a regression-based method for combining analyst forecasts to improve forecasting efficiency. This method significantly reduces the bias in earnings forecasts, and generates forecasts that consistently outperform consensus forecasts over time and across firms of different characteristics. Incorporating firm-level and macroeconomic informa...
Investigating the pricing of jump and volatility risk in the cross-section of corporate bonds, we find that bonds with high jump and volatility betas have low expected returns. The jump and volatility risk effects are economically significant, exhibit an intra-rating pattern, and increase as ratings decrease. While both jump and volatility risk eff...
We document strong evidence of the cross-sectional predictability of corporate bond returns based on a set of yield predictors that capture the information in the yields of past 1, 3, 6, 12, 24, 36, and 48 months. Return predictability is economically and statistically significant, and is robust to various controls. The uncovered predictability pre...
This paper investigates price violations in credit markets using a data sample spanning from 2002 to 2016. We find that price violations are highly persistent during the crisis period, particularly for speculative‐grade bonds. There is evidence that price distortions and market disintegration are linked to market‐wide and firm‐level impediments to...
Using a large number of predictors and based on an extended iterated combination approach , we document both statistical and economic significance of Treasury bond return predictability. Macroeconomic and aggregate liquidity variables contain predictive information for bond returns and combining them with term structure and Ludvigson-Ng macro facto...
We propose an investor sentiment measure at the bond level and find it has strong cross-sectional predictive power for corporate bond returns. Our results show that greater investor sentiment leads to lower future bond returns. A long-short portfolio that buys low sentiment bonds and shorts high sentiment ones generates economically and statistical...
Using a comprehensive return data set and an array of 27 macroeconomic, stock, and bond predictors, we find that corporate bond returns are highly predictable based on an iterated combination model. The large set of predictors outperforms traditional predictors substantially, and predictability generated by the iterated combination is both statisti...
This paper investigates whether momentum exists in the corporate bond market. Instead of relying on the price information from just a single time horizon, we incorporate all trend signals in the short, intermediate and long terms simultaneously. Using this informationally efficient strategy, we uncover strong and significant momentum for all bonds...
This paper analyzes the price difference between superior voting (SV) and inferior voting (IV) shares for three dual-class firms: Farmer Mac as a big price discount case, Fox as a price similarity case, and Heico as a big price premium case. We show that the price difference is mainly affected by the control benefit, while voting power and liquidit...
A large number of municipal bonds are guaranteed by monoline insurers who are at the center of the subprime crisis. This article investigates the effect of insurer-related counterparty risk on municipal bond pricing using a comprehensive dataset. The authors estimate both insurer-specific and systemic components of a counterparty risk effect. Resul...
This paper extends the macroeconomic frailty model to include sectoral frailty factors that capture default correlations among firms in a similar business. We estimate sectoral and macroeconomic frailty factors and their effects on default intensity using the data for Japanese firms from 1992 to 2010. We find strong evidence for the presence of sec...
Using a comprehensive data set, we �find that corporate bond returns are not only predictable by traditional predictors (default spreads, term spreads, dividend yields, and issuer quality) but highly predictable by a new regressed combination model that combines information from an array of 27 macroeconomic, stock and bond predictors. The predictiv...
Previous studies have documented the informational role of order imbalances in price discovery of the Treasury market. In this paper, we explore the liquidity dimension of order imbalances. Through our research, we find evidence which indicates that order imbalances affect Treasury market liquidity. More importantly, order imbalances have significa...
This paper examines the informational role of trades in the corporate bond market. Using transaction data, we compare the temporal relation between volume and volatility of returns for both bonds and stocks issued by the same firms. We find a dramatic difference between these two securities. While there is a strong positive relation between return...
This paper documents the economic and financial recovery of East Asia based on its real GDP, export, currency value and stock performance since the 1997 financial crisis. A macroeconomic model is used to estimate the chain effect of international trade on Asian recovery. It is found that the U.S. economy had a significant impact on the recovery of...
A common wisdom about term structure models is that they predict much lower spreads than the observed spreads for investment-grade bond, and most of them tend to overpredict spreads for junk bonds. Among them, the Leland-Toft model is perhaps most controversial. Some studies show it always overpredict spreads, in some cases they can be as high as o...
This paper examines predictability of corporate bond returns using the transaction-based index data for the period from October 1, 2002 to April 30, 2009. We find evidence of significant serial and cross-serial dependence in daily investment-grade and high-yield bond returns. The serial dependence exhibits a complex nonlinear structure. Stock marke...
This paper investigates the role of liquidity risk in the momentum spillover from stocks to bonds of the same firm using a large data sample from 1994 to 2009. We find that the liquidity risk premium explains a significant portion of the bond return associated with the equity momentum spillover. This finding is robust to controls for stock and bond...
In this paper, we propose an alternative approach to estimate the components of corporate bond and CDS spreads. We develop a CDS pricing model with default and nondefault factors, and a corporate bond pricing model with default, tax and liquidity factors using the reduced-form approach, and jointly estimate parameters of both models from pooled dat...
The structural approach offers an integrated framework to deal with yield spreads and default probability simultaneously. However, structural models perform poorly in predicting corporate bond spreads. It is unclear whether this poor performance is caused by characteristics of individual models, missing factors, or different calibration procedures....
This paper examines the contribution to price discovery by electronic and voice-based trading systems in the U.S. Treasury market. Evidence shows that the electronic trading system has more price discovery and that trading automation increases the speed of incorporating information into prices. However, human trading generates significant price dis...
This paper studies the pricing of liquidity risk in the cross section of corporate bonds for the period from January 1994 to March 2009. The average return on bonds with high sensitivities to aggregate liquidity exceeds that for bonds with low sensitivities by about 4% annually. The positive relation between expected corporate bond returns and liqu...
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 defa...
In this chapter, we survey modern term structure models for pricing fixed income securities and their derivatives. We first
introduce bond pricing theory within the dynamic term structure model (DTSM) framework. This framework provides a general
modeling structure in which most popular term structure models are nested. These include affine, quadrat...
We study intraday return volatility dynamics using a time-varying components approach, and the method is applied to analyze IBM intraday returns. Empirical evidence indicates that with three additive components—a time-varying mean of absolute returns and two cosine components with time-varying amplitudes—together they capture very well the pronounc...
In this paper, we examine the trading activity and return volatility pattern before and after splits. Unlike previous studies, we employ high-frequency transaction data and more powerful asymptotical tests on the impact of split on volatility. Furthermore, we examine the relationship between volatility and volume using different volatility measures...
This paper examines the effects of default risk, call risk, and their interactions on bond duration. We find that call risk decreases durations of default-free bonds, while default risk alone generally decreases durations for risky bonds with only a few exceptions. The joint effect of default and call risk always results in shorter durations for co...
We evaluate the efficacy of price discovery in the round-the-clock U.S. Treasury market. Using a comprehensive intraday database, we explore informational role of trades over the 24-hour day. We find that information asymmetry is generally highest in the preopen period and lowest in the postclose period. Information asymmetry in the overnight perio...
Empirical findings are mixed about the performance of structural models for term structure of credit spreads. It is commonly believed that all structural models have equally poor performance after calibration. However, proper calibration is not a trivial issue, especially for highly structural models. This paper proposes a more accurate procedure f...
We provide a comprehensive empirical analysis of the effects of liquidity and information risks on expected returns of Treasury bonds. We focus on the systematic liquidity risk of Pastor and Stambaugh as opposed to the traditional microstructure-based measures of liquidity. Information risk is measured by the probability of information-based tradin...
We investigate the information cost of stock trading during the 2000 presidential election. We find that the uncertainty of the election induces information asymmetry of politically sensitive firms under the Bush/Gore platforms. The unusual delay in election results creates a significant increase in the adverse selection component of the trading co...
Previous studies have found that common factors explain a high proportion of corporate bond yields. In this paper, we test whether there is a systematic risk premium beyond that implied by a risk-neutral term structure model. We propose a reduced-form term structure model that incorporates both default and tax effects. After controlling the effects...
We study the effect of liquidity risk on the relative yields on municipal and taxable bonds. We employ a reduced-form model with liquidity intensity and taxes to price tax-exempt bonds. Using a unique transaction dataset, we directly estimate marginal tax rate and liquidity intensity from observed data for insured municipal bonds. The empirical est...
This paper employs a new approach to estimating the size of liquidity premia in the credit default swap (CDS) and corporate bond markets. We develop a CDS pricing model with liquidity and default, and a corporate bond pricing model with default, taxes, and liquidity using the reduced-form approach, and jointly estimate parameters of both pricing mo...
Using a popular three-factor term structure model that accounts for the correlation between default and interest rates to fit corporate bond yields, we uncover missing factors in the model. The principal component analysis indicates that the model residuals of bonds across different ratings and maturities are driven by some common factors. Further...
This paper presents a new approach for estimating default correlation by linking default correlation to equity return correlation while preserving the fundamental relation between default and asset correlations in the structural framework. Our hybrid model thus overcomes a long-standing empirical difficulty that default correlation estimation relie...
This article provides a survey on term structure models designed for pricing fixed income securities and their derivatives.
Abstract This study develops and empirically implements structural frameworks that link default correlation to equity ,correlation that can be estimated ,using the observable equity data. This approach ,overcomes ,the empirical difficulty of estimating ,the unobservable ,asset process in the structural-form default ,correlation models. The empirica...
This paper investigates whether marketwide liquidity is an important state variable for corporate bond pricing. We focus on the systematic risk of corporate bond returns, as opposed to the traditional microstructure-based measures of liquidity. We find that expected corporate bond returns are significantly related cross-sectionally to systematic li...
We examine the effects of liquidity, default and personal taxes on the relative yields of Treasuries and municipals using a generalized model with liquidity risk. The municipal yield model includes liquidity as a state factor. Using a unique transaction dataset, we estimate the liquidity risk of municipals and its effect on bond yields. Empirical e...
Using the information in credit default swaps, we directly estimate the default, tax and liquidity components in the corporate yield spread from a generalized pricing model with taxes. Incorporating the credit default swap information facilitates disentangling the liquidity and default premia while including the tax rate in the pricing model helps...
This note deals with the conditional form of the law of large numbers (LLN). Let $T$ be a separable metric space, equipped with a non atomic probability $Q$, and $\mathcal{H}$ the class of Borel subsets $H\subset T$ satisfying $Q(H)>0$. Let $\mathcal{P}$ be any consistent set of finite dimensional distributions indexed by $T$. If $\mathcal{H}_0\sub...
In this paper we propose a pricing model of corporate bonds that incorporate the three important factors, default risk, liquidity and taxes, commonly considered as the most influential determinants of the yield spread in the fixed income literature. Using the information in credit default swap premia to overcome an econometric identification proble...
Using a systematic liquidity factor extracted from the yield spread between on- and off-the-run Treasury issues as a state variable, we jointly estimate the default and liquidity spreads from corporate bond prices. We find that the liquidity factor is strongly related to conventional liquidity measures such as bid-ask spread, volume, order imbalanc...
This paper examines the serial and cross dependence in corporate bond returns and stock returns. Using robust test methods, we document strong serial dependence and cross dependence in corporate bond returns. There is also evidence that the stock market return leads the corporate bond market returns. The results indicate that the corporate bond mar...
This paper investigates whether trading and quoting prices are rounded for both economic and cultural reasons on the Shanghai and Shenzhen Stock Exchanges in China. We find that the close, bid, and ask prices of domestic shares are rounded to the nearest 10s and 5s for economic reasons, and the last decimal point of prices clusters on 8 for cultura...
Term structure models have often been criticized for failing to explain satisfactorily the yield spread between corporate and Treasury bonds. A potential problem is that the personal tax effect is ignored in these models. In this paper, we employ a structural model to investigate the role of personal taxes on both debt and equity returns in capital...
This paper examines volume and volatility dynamics by accounting for market activity measured by the time duration between two consecutive transactions. A time-consistent vector autoregressive (VAR) model is employed to test the dynamic relationship between return volatility and trades using intraday irregularly spaced transaction data. The model i...
Existing term structure models have often underestimated corporate bond spreads. A potential concern is that personal taxes are ignored in these models. This paper examines the effects of personal taxes on the pricing of corporate bonds. We propose a defaultable bond model that accounts for time-varying default probability and differential tax trea...
This paper examines the relationship among daily information flow, return volatility, and bid-ask spreads based on the framework of the mixture of distribution hypothesis (MDH). The MDH model is modified to permit separate effects of informed and liquidity trading volume on return volatility. The results show that the positive relationship between...
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 defa...
We examine the interactive effect of default and interest rate risk on duration of defaultable bonds. We show that duration for defaultable bonds can be longer or shorter than default-free bonds depending on the relation between default intensity and interest rates. Empirical evidence indicates that in most cases duration for defaultable bonds is m...
This paper examines short-run information transmission between the U.S. and U.K. markets using the S&P 500 and FTSE 100 index futures. Ultrahighfrequency futures data are employed—which have a number of advantages over the low-frequency spot data commonly used in previous studies—in establishing that volatility spillovers are in fact bidirectional....
We examine the effects of liquidity and information risks on expected returns of U.S. government bonds. Information risk is measured by probability of information-based trading (PIN) derived from the market microstructure model of Easley, Hvidkjaer, and O'Hara (2002). Liquidity risk is captured by sensitivity of individual bond returns to a market-...
We examine the composition of return volatility, serial correlation, and trading costs before and after decimalization on the New York Stock Exchange. We decompose the variance of price changes into components associated with public news, rounding errors, and market-making frictions. We find that when stocks move from a fractional to a decimal trad...
Abstract Current U.S. tax laws provide investors an incentive to time the sales of their bonds to minimize,tax liability. T his gives rise to a tax timing option that affects bond value. I n reality, corporate bond investors’ tax-timing strategy is complicated by risk of default. E xisting term structure models have ignored the effect of the,tax-ti...
We examine the relative yields of Treasuries and municipals using a generalized model that includes liquidity as a state factor. Using a unique transaction dataset, we are able to estimate the liquidity risk of municipals and its effect on bond yields. We find that a substantial portion of the maturity spread between long- and short-maturity munici...
We examine the relative yields of Treasuries and municipals using a generalized model that includes liquidity as a state factor. Using a unique transaction dataset, we are able to estimate the liquidity risk of municipals and its effect on bond yields. We find that a substantial portion of the maturity spread between long- and short-maturity munici...
We investigate price rounding before and after the pilot decimalization on the NYSE. We find that although rounding exists in transaction, bid, and ask prices in both the pre- and postdecimalization periods, it becomes less salient after the decimalization. The cross-sectional relationship between rounding and trading variables is similar before an...
In this article we examine the interaction of brokerage search with the Bayesian learning behavior of competitive dealers under asymmetric information. We particularly focus on the effects of price search and discretionary trading on the performance of a dealer market. A search process is incorporated into a model in which brokers determine their r...
This paper examines the information flow, return volatility, and trading costs of infrequently traded stocks. A mixture-of-distribution model is employed to decompose volume into informed and liquidity components. It is found that the intensity of informed trading is higher for infrequently traded stocks. This higher intensity of informed trading c...
Return volatility is found significantly higher for the foreign shares (B shares) than for the domestic shares (A shares) traded in the Chinese stock markets. To explain this volatility disparity, we investigate the bid–ask spreads and estimate the market-making costs (informed trading and noninformed trading costs) for each stock. Our results show...
We investigate the international information transmission between the U.S. and Polish stock markets using daily return data from the S&P 500 Index and the Warszawski Indeks Gieldowy (WIG). The results show no volatility spillover between these two markets and that these two markets are not driven by a long-run common trend. However, there is a mean...
This paper examines whether the decrease in bid-ask spreads on Nasdaq after the 1997 reforms is due to a decrease in market-making costs and/or an increase in market competition for order flows. Unlike previous studies, we jointly examine how competition and trading costs affect bid-ask spreads. In addition, we separate the effects of informed trad...
We report further evidence of the difference in execution costs between Nasdaq and the NYSE before and after the 1997 market reforms. We find that informed trading costs are consistently higher on Nasdaq both before and after the reforms. In the pre-reform period the Nasdaq-NYSE disparity in bid-ask spreads cannot be completely attributed to the di...
We provide further evidence on the stochastic behavior of the futures minus cash index basis. In addition to infrequent trading, we identify index aggregation as an additional source of mean reversion in basis changes. An aggregation of individual stocks in the index portfolio produces a moving average component that induces a negative autocorrelat...
We suggest an alternative framework to explain the asymmetric return cross (serial)-correlation. We identify two major sources of the asymmetric cross-correlation: (1) the difference in the sensitivity of stock returns to economic factors, and (2) the differential quality of information between large and small firms. We find that the difference in...
In this paper, we examine the relationship between volume and return volatility using the transaction data. We introduce transaction and volume imbalance measures to capture the information content of trades. These two information measures are shown to have a strong explanatory power for return volatility and contain incremental information about t...
In this article, we examine the relation between return volatility, average trade size, and the frequency of transactions using transaction data. Consistent with Jones, Kaul, and Lipson (1994)(. Review of Financial Studies, 7, 631–651), our results show that the frequency of trades has a high explanatory power for return volatility. However, contra...
This paper develops a model to estimate the implied default probability of corporate bonds. The model explicitly considers the risk averse behavior of investors to provide a more precise framework for estimating the implied default probability. A Kalman filter method is used to estimate time-varying risk premium associated with the investor's risk...
This paper develops a model of security broker behavior under price uncertainty. The model examines the process of matching orders and the determinants of equilibrium brokerage commission rates. Institutional arrangements, search efficiency, execution costs, volume, risk, and the unit price of the security are shown to affect equilibrium brokerage...
This paper generalizes the risk-return relationship implied by the traditional capital asset pricing model with finite investment horizons. It examines the effect of heterogeneous investment horizons on the functional form of capital asset pricing and proposes a translog model for estimating the risk-return relationship. In addition, this paper con...
This paper analyzes the dividend adjustment process in the presence of cost of adjustment and information uncertainty. It proposes an integrated model consistent with the practical decision process to characterize the dividend adjustment process. It is analytically demonstrated that the residual theory, partial adjustment and adaptive expectations...
An analysis is performed of the impact of kurtosis on the stationarity of the standard deviation and beta risk. To test the intertemporal stationarity of variance estimates, monthly returns for 464 securities on the CRSP monthly return file, having no missing observations during the period January 1959-December 1979, were gathered. Data are grouped...
We examine asymmetric information patterns in the round-the-clock U.S. Treasury market, and find that the information content of trades varies considerably over the 24-hour day. Informed trading intensity is higher, and impacts of public and private information shocks on prices are stronger in the overnight and preopen periods than other time of th...
In this paper, we propose a new method to estimate the components of corporate bond and CDS spreads. We develop a CDS pricing model with default and nondefault factors, and a corporate bond pricing model with default, tax and liquidity factors using the reduced-form approach, and jointly estimate parameters of both models from pooled data. By formu...