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Junbo Wang - One of the best experts on this subject based on the ideXlab platform.
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Prospect theory and Corporate Bond returns: An empirical study
Journal of Empirical Finance, 2018Co-Authors: Xiaoling Zhong, Junbo WangAbstract:Since the 1980s, prospect theory has been considered as the most successful descriptive theory for decision making. In this paper, we examine the predictive power of prospect theory in the U.S. Corporate Bond market. The empirical evidence shows that prospect theory has significant predictive power for Corporate Bond returns, especially for junk Bond returns. Unlike the findings for the stock market, the loss aversion component plays the most important role in predicting Corporate Bond returns. The probability weighting component also plays a predictive role for junk Bonds, but not for investment-grade Bonds.
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Predictions of Corporate Bond excess returns
Journal of Financial Markets, 2014Co-Authors: Hai Lin, Junbo WangAbstract:Abstract In this paper, we investigate the predictability of Corporate Bond excess returns using a comprehensive data sample for the period from January 1973 to December 2010. We find that Corporate Bond returns are more predictable than stock returns, and the predictability tends to be higher for low-grade Bonds and short-maturity Bonds. A forward rate factor captures substantial variations in expected Bond excess returns. Furthermore, liquidity factors and a Bond׳s credit spread have predictive power on Corporate Bond excess returns. Combining these variables with traditional predictors significantly improves the performance of the predictive model for Corporate Bond returns.
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The informativeness of Corporate Bond trades
Review of Pacific Basin Financial Markets and Policies, 2011Co-Authors: Peter Huaiyu Chen, Junbo WangAbstract: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 volatility and volume for stocks, this relation is much weaker for Corporate Bonds. This finding holds not only for straight Bonds but also for callable and convertible Bonds. Empirical evidence reveals a very different relation between volatility and volume in the Corporate Bond market than predicted by standard microstructure models. Results show that the role of volume and trade frequency can be quite different across asset classes.
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liquidity risk and expected Corporate Bond returns
Journal of Financial Economics, 2011Co-Authors: Hai Lin, Junbo WangAbstract:Abstract 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 liquidity beta is robust to the effects of default and term betas, liquidity level, and other Bond characteristics, as well as to different model specifications, test methodologies, and a variety of liquidity measures. The results suggest that liquidity risk is an important determinant of expected Corporate Bond returns.
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The determinants of Corporate Bond yields
The Quarterly Review of Economics and Finance, 2009Co-Authors: Sheen Liu, Jian Shi, Junbo WangAbstract:Abstract 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 of personal taxes and default risk, empirical tests show that at least two of the Fama–French factors are important for Corporate Bond yields. Our results suggest that term structure models should inCorporate aggregate common risk factors in order to better explain the dynamics of Corporate Bond yields.
Hao Jiang - One of the best experts on this subject based on the ideXlab platform.
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Dynamic Liquidity Management by Corporate Bond Mutual Funds
Journal of Financial and Quantitative Analysis, 2020Co-Authors: Hao Jiang, Ashley WangAbstract:Abstract How do Corporate Bond mutual funds manage liquidity to meet investor redemptions? We show that during tranquil market conditions, these funds tend to reduce liquid asset holdings to meet redemptions, temporarily increasing relative exposures to illiquid asset classes. When aggregate uncertainty rises, however, they tend to scale down their liquid and illiquid assets proportionally to preserve portfolio liquidity. This fund-level dynamic management of liquidity appears to affect the broad financial market: Redemptions from the Corporate Bond fund sector lead to more Corporate Bond selling during high-uncertainty periods, which generates price pressures and predicts strong return reversals.
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Investor flows and fragility in Corporate Bond funds
Journal of Financial Economics, 2017Co-Authors: Itay Goldstein, Hao JiangAbstract:Abstract This paper explores flow patterns in Corporate Bond mutual funds. We show that Corporate Bond funds exhibit a concave flow-to-performance relationship: their outflows are sensitive to bad performance more than their inflows are sensitive to good performance. Moreover, Corporate Bond funds tend to have greater sensitivity of outflows to bad performance when they have more illiquid assets and when the overall market illiquidity is high. These results point to the possibility of fragility in the fast-growing Corporate Bond market. The illiquidity of Corporate Bonds may generate a first-mover advantage among investors in Corporate Bond funds, amplifying their response to bad performance.
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Investor Flows and Fragility in Corporate Bond Funds
SSRN Electronic Journal, 2015Co-Authors: Itay Goldstein, Hao JiangAbstract:Investment in Bond mutual funds has grown rapidly in recent years. With it, there is a growing concern that they are a new source of potential fragility. While there is a vast literature on flows in equity mutual funds, relatively little research has been done on Bond mutual funds. In this paper, we explore flow patterns in Corporate-Bond mutual funds. We show that their flows behave quite differently than those of equity mutual funds. While we confirm the well-known convex shape for equity funds’ flow-to-performance over the period of our study (1992-2014), we show that during the same time, Corporate Bond funds exhibit no convexity. Under some performance benchmarks, Corporate Bond funds even exhibit a concave shape: their outflows are sensitive to bad performance more than their inflows are sensitive to good performance. Moreover, Corporate Bond funds tend to have more concave flow-performance relationships when they have more illiquid assets and when the overall market illiquidity is high. These results point to the possibility of fragility: The illiquidity of Corporate Bonds may generate a first mover advantage (or strategic complementarities) among investors in Corporate-Bond funds, amplifying their response to bad performance or other bad news.
Oskar Kowalewski - One of the best experts on this subject based on the ideXlab platform.
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What drove the Corporate Bond markets in Asia after 1995
2018Co-Authors: Oskar Kowalewski, Paweł PisanyAbstract:We investigate the development of Corporate Bond markets in 10 Asian countries from 1995 to 2014. Using data on outstanding value and total issue of Bonds by financial and non-financial companies, we confirm that macroeconomic and institutional factors are related to the depth of the Corporate Bond market. We show that creditor rights and institutional quality are important in explaining the size of outstanding value and issuance of Corporate Bonds. Furthermore, we determine a strong positive association between the level of domestic credit and the outstanding value and issue of Corporate Bonds. From the results, we surmise that there is a positive relationship between the development of the Corporate Bond market and the banking sector. These findings indicate that increased demand for bank loans induced the issuance of Bonds by financial institutions, which, in turn, might have led to the development of Corporate Bond markets in Asia. Finally, we document that the development of Corporate Bond markets might have helped mitigate the outcome of the financial crisis of 2008 in Asia.
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Creditor rights and Corporate Bond market
Journal of International Money and Finance, 2016Co-Authors: Xian Gu, Oskar KowalewskiAbstract:We examine whether investor protection affects capital markets in terms of the development of Corporate Bond markets versus that of equity markets. Using a dataset of 42 countries, we show that in countries with stronger creditor rights, Corporate Bond markets are more developed than equity markets. In opposition, we find only weak evidence that in countries with stronger shareholder protection, equity markets are more developed than Corporate Bond markets. Additionally, we find that the effects of financial reforms on capital markets are strongly dependent on the strength of investor protections in a given country and information disclosure.
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Creditor rights and the Corporate Bond market
Journal of International Money and Finance, 2016Co-Authors: Oskar KowalewskiAbstract: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.
Yoshio Nozawa - One of the best experts on this subject based on the ideXlab platform.
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Is There Froth in the Corporate Bond Market
Social Science Research Network, 2019Co-Authors: Yoshio NozawaAbstract:Applying the variance decomposition approach to Corporate credit spreads, I extract time-varying long-run risk premiums on the Corporate Bond market portfolio that are easy to compare with the predictions of asset pricing models. The expected cash flows from Corporate Bonds, identified by predicting default and exercise of embedded call options, are slow-moving, while risk premiums are subject to high-frequency fluctuation and countercyclical. The variation in risk premiums on the Corporate Bond market portfolio is largely consistent with the CAPM benchmark with time-varying risk exposure.
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Liquidity Supply in the Corporate Bond Market
SSRN Electronic Journal, 2018Co-Authors: Jonathan E. Goldberg, Yoshio NozawaAbstract:This paper examines dealer inventory capacity, or liquidity supply, as a driver of liquidity and expected returns in the Corporate Bond market. We identify shocks to aggregate liquidity supply using data on Corporate Bond yields and dealer positions. Liquidity supply shocks lead to persistent changes in market liquidity, are correlated with proxies for dealer financial constraints, and have significant explanatory power for cross-sectional and time-series variation in expected returns, beyond standard risk factors. Our findings point to liquidity supply by financially constrained intermediaries as a main driver of market liquidity and asset prices.
William F Maxwell - One of the best experts on this subject based on the ideXlab platform.
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markets transparency and the Corporate Bond market
Journal of Economic Perspectives, 2008Co-Authors: Hendrik Bessembinder, William F MaxwellAbstract:For decades, Corporate Bonds primarily traded in an opaque environment. Quotations, which indicate prices at which dealers are willing to transact, were available only to market professionals, most often by telephone. Prices at which Bond transactions were completed were not made public. The U.S. Corporate Bond market became much more transparent with the introduction of the Transaction Reporting and Compliance Engine (TRACE) in July 2002. Beginning that date, Bond dealers were required to report all trades in publicly issued Corporate Bonds to the National Association of Security Dealers, which in turn made transaction data available to the public. In this paper, we describe trading protocols in the Corporate Bond market and assess the impact of the increase in transparency on the market. We review how TRACE has affected the costs that Corporate Bond investors paid to Bond dealers for their transactions. We canvass the opinions of a variety of finance professionals and consider articles in the trade press to obtain a broader view of the impact of transparency on the Corporate Bond market.
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transparency and the Corporate Bond market
SMU Cox: Finance (Topic), 2008Co-Authors: William F Maxwell, Hendrik BessembinderAbstract:The U.S. Corporate Bond market underwent a fundamental change with the introduction of TRACE in 2002. Beginning on that date, Bond dealers were required to report all trades in publicly-issued Corporate Bonds to the National Association of Security Dealers, which in turn made transaction data available to the public. In this paper, we assess the impact of the increase in transparency on the Corporate Bond market. Investors have benefited from the increased transparency, through substantial reductions in the bid-ask spreads that they pay to Bond dealers to complete trades. Conversely, Bond dealers have experienced reductions in employment and compensation, and dealers' trading activities have moved toward alternate securities, including syndicated bank loans and credit default swaps. The primary complaint against TRACE is that trading is more difficult as dealers are reluctant to carry inventory and no longer share the results of their research. In essence, the cost of trading Corporate Bonds decreased, but so did the quality and quantity of the services formerly provided by Bond dealers. The debate regarding optimal transparency of the Corporate Bond markets continues, and the question of what degree of transparency in security markets is desirable will remain the subject of study and debate for the foreseeable future.
