Nils Friewald's research while affiliated with NHH Norwegian School of Economics and other places

Publications (15)

Article
This paper presents empirical evidence that the maturity structure of financial leverage affects the cross‐section of equity returns. We find that short‐term leverage is associated with a positive premium, whereas long‐term leverage is not. The premium for short‐term compared to long‐term leverage reflects higher exposure of equity to systematic ri...
Article
We empirically study whether systematic over‐the‐counter (OTC) market frictions drive the large unexplained common factor in yield spread changes. Using transaction data on U.S. corporate bonds, we find that marketwide inventory, search, and bargaining frictions explain 23.4% of the variation in the common component. Systematic OTC frictions thus s...
Article
Full-text available
We empirically study whether systematic over-the-counter (OTC) market frictions drive the large unexplained common factor in yield spread changes. Using transaction data on U.S. corporate bonds, we find that marketwide inventory, search, and bargaining frictions explain 23.4% of the variation of the common component. Systematic OTC frictions thus s...
Article
We show that the mixed evidence on how financial leverage affects stock returns can be reconciled by accounting for firms' debt maturity structures. In our model, firms jointly optimize leverage and debt maturity by balancing benefits and rollover risk of short-term relative to long-term debt. Shareholders require returns that increase with, both,...
Article
Full-text available
We use a unique data set from the Trade Reporting and Compliance Engine (TRACE) to study liquidity effects in the U.S. structured product market. Our main contribution is the analysis of the relation between accuracy in measuring liquidity and the level of detail of the trading data employed. We find evidence that, in general, liquidity measures th...
Article
Inventory models of dealership markets imply that intermediaries reduce their exposure to inventory risk by offering prices different from fundamental values. Therefore, inventory levels should affect asset prices and thus returns. We explore the cross-sectional relation between US corporate bond inventories and returns. Our findings provide strong...
Article
We develop and empirically test a theory of optimal security design under adverse selection accounting for strategic trading by uninformed investors who will liquidate a security in secondary markets only if their idiosyncratic carrying costs exceed the security's expected trading loss. Such investors demand primary market discounts equaling expect...
Article
We develop and empirically test a theory of optimal security design under adverse selection accounting for strategic trading by uninformed investors who will liquidate a security in secondary markets only if their idiosyncratic carrying costs exceed the security's expected trading loss. Such investors demand primary market discounts equaling expect...
Article
We explore the link between a firm's stock returns and its credit risk using a simple insight from structural models following Merton (1974): risk premia on equity and credit instruments are related because all claims on assets must earn the same compensation per unit of risk. Consistent with theory, we find that firms' stock returns increase with...
Article
Full-text available
We analyze liquidity effects in the US fixed-income securitized product market using a unique data-set compiled by the Financial Industry Regulatory Authority (FINRA), containing all transactions between May 16, 2011 and February 29, 2012. We employ a wide range of liquidity proxies proposed in the academic literature that rely on various informati...
Article
Full-text available
We investigate whether liquidity is an important price factor in the UScorporate bond market. In particular, we focus on whether liquidityeects are more pronounced in periods of nancial crises, especially forbonds with high credit risk, using a unique data set covering more than20,000 bonds, between October 2004 and December 2008. We employ a wider...
Article
Full-text available
We investigate whether liquidity is an important price factor in the US corporate bond market. In particular, we focus on whether liquidity effects are more pronounced in periods of financial crises, especially for bonds with high credit risk, using a unique data set covering more than 20,000 bonds, between October 2004 and December 2008. We employ...
Article
Full-text available
In this research project, we analyze the trading activity in the US market for securitized fixed income products, such as asset-backed securities (ABS), collateralized mortgage obligations (CMO) and other similar securities. With an average daily trade volume of over $300 billion, this is an important debt market in the US and in the world. The ins...
Article
Modeling default dependence for measuring and managing portfolio credit risk is one of the most challenging problems in modern finance. The standard industry model is a multi-variate Gaussian latent-variable model, where the latent variables are associated with log asset value processes. These processes are most commonly modeled by a firm-specific...
Article
In this paper we value a callable snowball floater, a complex interest rate instrument with variable coupon payments, which depend on the prevailing interest rates in arrears and recursively on previous coupon payments. The embedded option requires solving an optimal stopping problem using the dynamic programming principle. A well-known and widely...

Citations

... Therefore, PIN is the ratio of the arrival rate of information-based trades to the arrival rate of all trades, which is the fraction of orders that emerge from informed traders or the probability of the opening trade being information-based. Recent studies that use PIN as a measure of the probability of informed trading (Bennett et al. 2020;De Angelis et al. 2017;Friewald and Nagler 2019;Manconi et al. 2018) find that a higher PIN reflects higher information asymmetry in the stock market. ...
... In this subsection, we analyze the (benchmark) scenario in which the issuer faces multiple liquidity suppliers that have a discount factor of one. In this case, the issuer receives competitive ultimatum price quotes, a feature that is common in the literature (see, e.g., Boot and Thakor 1993, Nachman and Noe 1994, Friewald, Hennessy, and Jankowitsch 2015 and delivers results that are consistent with DeMarzo's (2005) seminal analysis of pooling decisions in a competitive environment. 7 ...
... Our paper is also related to the literature on MBS market structure and liquidity, including Bessembinder, Maxwell, and Venkataraman (2013), Friewald, Jankowitsch, and Subrahmanyam (2017), Gao, Schultz, and Song (2018), Schultz and Song (2019), Huh and Kim (2021), and Liu, Song, and Vickery (2021). Our paper adds to this literature by connecting MBS market microstructure to asset pricing, along the lines of the seminal work of Amihud and Mendelson (1986) and the literature surveyed in Easley and O'Hara (2003), Amihud, Mendelson, and Pedersen (2006) and Vayanos and Wang (2013). ...
... Stability is necessary because statistical models used as benchmarks for transaction costs need to perform well for historical data, and to exhibit good out-of-sample performance. Moreover, sparsity lends more explainability to a regression model: the Reference Dataset(s) Name(s) Period covered [Schultz, 2001] CAI 1995-1997[Chakravarty and Sarkar, 2003] NAIC 1995-1997[Chordia et al., 2005 TAQ, ISSM (Nyse), GovPX 1991-1998[Bessembinder et al., 2006 NAIC + TRACE 2001 ;2002[Goldstein et al., 2007] TRACE 2002[Biais and Green, 2007 Nyse Archives 1926Archives -19301943-1948[Dick-Nielsen et al., 2012 TRACE 2003[Asquith et al., 2013 TRACE [Friewald and Nagler, 2014 Labelled TRACE 2003-2013 [Mizrach, 2015] TRACE 2002[Hendershott and Madhavan, 2015 [Vapnik and Chervonenkis, 1971]. It addressed the use of statistics to model relationships between variables when the underlying model is unknown. ...
... Apart from the Modigliani-Miller (M&M) theorem that suggests a positive relationship between leverage and firm value, recent studies also provide novel evidence on stock returns and leverage. For instance, Friewald, Nagler and Wagner (2018) suggested that stock returns increase with leverage and the intensity of debt refinancing. Meanwhile, Cheng, Liu and Chien (2010) documented an inverted-U relationship between leverage and firm value, and before the threshold, debt financing can improve the firm value. ...
... Asymmetric information between security issuers (or informed intermediaries) and buyers is the main driving force for a majority of these papers. 3 Thus, these papers often involve tranching (DeMarzo, 2005;Friewald, Hennessy, and Jankowitsch, 2016), a signalling component (Adelino et al., 2019), or an equity retention component (Begley and Purnanandam, 2017;Flynn et al., 2020). Also, Glaeser and Kallal (1997) show that pooling and limited disclosure increase liquidity. ...
... Details for the corporate bond, municipal bond, and securitized fixed income markets are provided in Friewald, Jankowitsch, and Subrahmanyam (2012a),Vickery and Wright (2010),and Friewald, Jankowitsch, and Subrahmanyam (2012b), respectively. ...
... While the focus of commonality literature has been on the equity market, empirical studies have also explored liquidity commonality in various other markets. For example, Subrahmanyam et al. (2012) explored commonality in liquidity in the bond market. Marshall et al. (2013) studied commonality in commodity markets. ...
... In order to better model and predict credit risk, researchers select specific data to construct prediction models, such as financial statements [10], [34], bond data [35], and loan data [36]. In addition to corporate financial data, researchers have found that corporate credit default swap (CDS) trading data can reflect corporate credit risk information [37], [38] therefore use CDS spreads to refer to the credit risk profile of firms. Some articles also use existing corporate credit rating data [13], or combine information from legal decisions with company financial data [11]. ...
... Part of the excess spread is attributed to illiquidity(Acharya et al. 2013;Ambrose et al. 2008;Chen et al. 2007;Longstaff et al. 2005). Another strand of literature focuses on the shorter-term impact of illiquidity on bond prices during liquidity crises such as the Global Financial Crisis(Dick-Nielsen et al. 2012;Friewald et al. 2012) and more recently on the Covid-19 crisis(Haddad et al. 2020;Kargar et al. 2021;O'Hara & Zhou 2020). Interestingly while equity markets also showed a large deterioration in liquidity during the GFC, this reversed post crisis. ...