Understanding aggregate default rates of high yield bonds

The New York-New Jersey region's hard-earned recovery in employment is being overshadowed by ongoing job losses in certain sectors and the prospect of moderating growth in the United States as a whole. Fortunately, several positive trends are bolstering the region's employment picture. Strength in the services sector, a falloff in restructuring, and gains in income point to continuing--though modest--regional job growth in 1996.Bonds

Why Do Firms Become Widely Held? An Analysis of the ynamics of Corporate Ownership

We consider IPO firms from 1970 to 2001 and examine the evolution of their insider ownership over time to understand better why and how U.S. firms that become widely held do so. In our sample, a majority of firms has insider ownership below 20% after ten years. We find that a firm's stock market performance and trading play an extremely important role in its insider ownership dynamics. Firms that experience large decreases in insider ownership and/or become widely held are firms with high valuations, good recent stock market performance, and liquid markets for their stocks. In contrast and surprisingly, variables suggested by agency theory have limited success in explaining the evolution of insider ownership.

Is Credit Event Risk Priced? Modeling Contagion via the Updating of Beliefs.

Empirical tests of reduced form models of default attribute a large fraction of observed credit spreads to compensation for jump-to-default risk. However, these models preclude a "contagion-risk'' channel, where the aggregate corporate bond index reacts adversely to a credit event. In this paper, we propose a tractable model for pricing corporate bonds subject to contagion-risk. We show that when investors have fragile beliefs (Hansen and Sargent (2009)), contagion premia may be sizable even if P-measure contagion across defaults is small. We find empirical support for contagion in bond returns in response to large credit events. Model calibrations suggest that while contagion risk premia may be sizable, jump-to-default risk premia have an upper bound of a few basis points.

Foreign Currency Exposure and Hedging: Evidence from Foreign Acquisitions

Previous research on the impact of currency risk on stock returns has failed to find a significant role for foreign exchange rates. This paper addresses several explanations of this finding with a unique dataset of U.S. firms that acquire targets in other countries. The dataset allows estimation of the impact of exchange rates using firm-specific bilateral exchange rates and a time period over which underlying exposure is known to significantly change. We also relate the change in exposure from before to after the acquisition to various characteristics of the acquirer, such as its presence in the target country prior to the deal and its hedging activities, and characteristics of the target, such as the exposure of the target prior to the deal. The results suggest that identifying a relevant exchange rate can be an important consideration in studying the impact of exchange rate risk on stock returns, but identifying financial hedging information is not. Further, foreign targets often provide operational hedging benefits to the U.S. acquirers, as exposure estimates are significantly affected by the acquisition

Credit Default Swap Auctions

Examines all of the CDS auctions conducted to date and evaluate their efficacy by comparing the auction outcomes to prices of the underlying bonds in the secondary market

Transparency and Liquidity: A Controlled Experiment on Corporate Bonds.

Abstract This paper reports the results of an experiment designed to assess the impact of last-sale trade reporting on the liquidity of BBB corporate bonds. Overall, adding transparency has either a neutral or positive effect on liquidity. Increased transparency is not associated with greater trading volume. Except for very large trades, spreads on newly-transparent bonds decline relative to bonds that experience no transparency change. However, we find no effect on spreads for very infrequently traded bonds. The observed decrease in transactions costs is consistent with investors' ability to negotiate better terms of trade once they have access to broader bond pricing data

Good and Bad Credit Contagion: Evidence from Credit Default Swaps,”

Abstract This study examines the information transfer effect of credit events across the industry, as captured in the Credit Default Swaps (CDS) and stock markets. Positive correlations across CDS spreads imply dominant contagion effects, whereas negative correlations indicate competition effects. We find strong evidence of dominant contagion effects for Chapter 11 bankruptcies and competition effect for Chapter 7 bankruptcies. We also introduce a purely unanticipated event, which is a large jump in a company's CDS spread, and find that this leads to the strongest evidence of credit contagion across the industry. These results have important implications for the construction of portfolios with credit-sensitive instruments. JEL Classifications: G14 (Market Efficiency), G18 (Policy and Regulation), G33 (Bankruptcy