Testing Merton's model for credit spreads on zero-coupon bonds

Structural models for valuing corporate bonds (beginning with Merton (1974)) have been criticised for giving spreads which are (a) too small and (b) have a term structure in which spreads diminish with extra time to maturity. Empirical tests of models are hampered by the complexity of real-world bonds, which have coupons, calls and sinking funds, and also by the complicated and changing capital structures adopted by companies. This paper exploits a new database of zero-coupon bonds issued by closed-end funds in the UK. These companies have very simple capital structures and transparent values for both assets and liabilities. Between 20 and 78 bonds are observable monthly over the period February 1992 to April 2001. Counter to previous research, we find that model and market spreads are on average of similar magnitude. Similar to previous research, market spreads are high (relative to model spreads) for bonds which have low risk and for bonds which are near to maturity. While the observed term-structure of credit spreads is upward-sloping, this may be explained by a predictable drift in leverage over time. On the whole, the results are surprisingly supportive of Merton’s model and suggest that it is important to allow for expected changes in leverage when computing credit spreads

Performance measurement with loss aversion

We examine a simple measure of portfolio performance based on prospect theory, which captures not only risk and return but also reflects differential aversion to upside and downside risk. The measure we propose is a ratio of gains to losses, with the gains and losses weighted (if desired) to reflect risk-aversion for gains and risk-seeking for losses. It can also be interpreted as the weighted ratio of the value of a call option to a put option, with the benchmark as the exercise price. When applying the loss-aversion performance measure to closed-end funds, we find that it gives significantly different rankings from those of conventional measures (such as the Sharpe ratio, Jensen’s alpha, the Sortino ratio, and the Higher Moment measure), and gives the expected signs for the odd and even moments of tracking errors. However, loss-aversion performance is not more closely related to discounts on funds than are the conventional performance measures, so we have not found evidence that loss-aversion attracts investors to particular funds in the short-term

Costly arbitrage and asset prices: evidence from closed-end funds

If arbitrage is costly and noise traders are active, asset prices may deviate from fundamental values for long periods of time. We use a sample of 158 closed-end funds to show that noise-trader sentiment, as proxied by retail-investor flows, leads to fluctuations in the discount. Nevertheless, we reject the hypothesis that noise-trader risk is the cause of the long-run discount. Instead we find that funds which are more difficult to arbitrage have larger discounts, due to: (i) the censoring of the discount by the arbitrage bounds, and (ii) the freedom of managers to increase charges when arbitrage is costly

Explaining CDS prices with Merton's model before and after the Lehman default

We examine whether CDS prices around the Credit Crisis can be explained with Merton's model. First we invert the model with market prices to reveal skewed volatility smiles over the whole 2005-2012 period. Then we calibrate the model to pre-Crisis data in two novel ways that allow for skewness, one based on equity-index options (MEIV) and the other on the sensitivity of CDS prices to equity volatility (MSKEW). In out-of-sample forecasts both calibrations match the in-Crisis peak of prices, but the second is better at capturing the systematic component of prices thereafter. Average CDS prices remain at twice their pre-Crisis level long after that event; the MSKEW calibration demonstrates that this is due to extra idiosyncratic risks, which are important for some firms but have negligible impact on others

A hexamer origin of the echinoderms' five rays

Of the major deuterostome groups, the echinoderms with their multiple forms and complex development are arguably the most mysterious. Although larval echinoderms are bilaterally symmetric, the adult body seems to abandon the larval body plan and to develop independently a new structure with different symmetries. The prevalent pentamer structure, the asymmetry of Loven's rule and the variable location of the periproct and madrepore present enormous difficulties in homologizing structures across the major clades, despite the excellent fossil record. This irregularity in body forms seems to place echinoderms outside the other deuterostomes. Here I propose that the predominant five-ray structure is derived from a hexamer structure that is grounded directly in the structure of the bilaterally symmetric larva. This hypothesis implies that the adult echinoderm body can be derived directly from the larval bilateral symmetry and thus firmly ranks even the adult echinoderms among the bilaterians. In order to test the hypothesis rigorously, a model is developed in which one ray is missing between rays IV-V (Loven's schema) or rays C-D (Carpenter's schema). The model is used to make predictions, which are tested and verified for the process of metamorphosis and for the morphology of recent and fossil forms. The theory provides fundamental insight into the M-plane and the Ubisch', Loven's and Carpenter's planes and generalizes them for all echinoderms. The theory also makes robust predictions about the evolution of the pentamer structure and its developmental basis. *** including corrections (see footnotes) ***Comment: 10 pages, 6 figure

Evaluation of variables influencing success and complication rates in canine total hip replacement:Results from the British Veterinary Orthopaedic Association Canine Hip Registry (collation of data: 2010-2012)

The objective of this study was to assess the variables associated with complications of total hip replacement (THR) and report owner-assessed outcomes. Entries into the British Veterinary Orthopaedic Association-Canine Hip Registry (BVOA-CHR) between September 2011 and December 2012 were reviewed separately and in conjunction with previous data (January 2010-August 2011). An outcomes assessment questionnaire was used to collect data from owners. Incidences of surgeon-reported and owner-reported complications were 8.2 per cent and 4.3 per cent, respectively. THR using the BioMedtrix BFX cup/stem prosthesis had a greater incidence of complications compared with THR using the BioMedtrix CFX cup/stem prosthesis (P=0.002); complications were 4.48 times more likely when using the BioMedtrix BFX cup/stem prosthesis versus the BioMedtrix CFX cup/stem prosthesis. THR using the BioMedtrix BFX cup/stem prosthesis had a higher incidence of complications compared with THR using a hybrid prosthesis (BioMedtrix BFX cup/CFX stem, BioMedtrix CFX cup/BFX stem) (P=0.046); complications were 2.85 times more likely when using the BioMedtrix BFX cup/ stem prosthesis versus a hybrid prosthesis. In 95 per cent of cases, owner satisfaction with the outcome of THR was 'very good' or 'good'. Complication rates from the BVOA-CHR are similar to previous studies. The data suggest that prosthesis type is associated with complication rate, with BioMedtrix BFX (circa 2012) having a high short-term complication rate

Global overview of the management of acute cholecystitis during the COVID-19 pandemic (CHOLECOVID study)

Background: This study provides a global overview of the management of patients with acute cholecystitis during the initial phase of the COVID-19 pandemic. Methods: CHOLECOVID is an international, multicentre, observational comparative study of patients admitted to hospital with acute cholecystitis during the COVID-19 pandemic. Data on management were collected for a 2-month study interval coincident with the WHO declaration of the SARS-CoV-2 pandemic and compared with an equivalent pre-pandemic time interval. Mediation analysis examined the influence of SARS-COV-2 infection on 30-day mortality. Results: This study collected data on 9783 patients with acute cholecystitis admitted to 247 hospitals across the world. The pandemic was associated with reduced availability of surgical workforce and operating facilities globally, a significant shift to worse severity of disease, and increased use of conservative management. There was a reduction (both absolute and proportionate) in the number of patients undergoing cholecystectomy from 3095 patients (56.2 per cent) pre-pandemic to 1998 patients (46.2 per cent) during the pandemic but there was no difference in 30-day all-cause mortality after cholecystectomy comparing the pre-pandemic interval with the pandemic (13 patients (0.4 per cent) pre-pandemic to 13 patients (0.6 per cent) pandemic; P = 0.355). In mediation analysis, an admission with acute cholecystitis during the pandemic was associated with a non-significant increased risk of death (OR 1.29, 95 per cent c.i. 0.93 to 1.79, P = 0.121). Conclusion: CHOLECOVID provides a unique overview of the treatment of patients with cholecystitis across the globe during the first months of the SARS-CoV-2 pandemic. The study highlights the need for system resilience in retention of elective surgical activity. Cholecystectomy was associated with a low risk of mortality and deferral of treatment results in an increase in avoidable morbidity that represents the non-COVID cost of this pandemic