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Book part
Publication date: 1 May 2023

Hui-Chu Shu, Jung-Hsien Chang, Chia-Fen Tsai and Cheng-Wen Yang

This study investigates the impacts of operational risks and corporate governance on bond yield spreads, examining their impacts on bond yield spreads during the COVID-19…

Abstract

This study investigates the impacts of operational risks and corporate governance on bond yield spreads, examining their impacts on bond yield spreads during the COVID-19 pandemic. The results indicate that operational risks significantly raise yield spreads, especially for high-leverage firms. Moreover, a higher independent director percentage reduces debt costs. Furthermore, the results reveal more pronounced effects of operational risks on yield spreads during the COVID-19 pandemic, with these risks increasing the financing costs for large firms. When the effect of the independent director percentage on the yield spreads increases, this consequently raises the debt costs for large firms.

Details

Advances in Pacific Basin Business, Economics and Finance
Type: Book
ISBN: 978-1-80382-401-7

Keywords

Open Access
Article
Publication date: 18 October 2022

Giulio Velliscig, Stefano Piserà, Maurizio Polato and Josanco Floreani

Some controversial cases of bail-in in the emerging countries have raised the question about whether for those countries to have in place a regulation for the bail-in is…

Abstract

Purpose

Some controversial cases of bail-in in the emerging countries have raised the question about whether for those countries to have in place a regulation for the bail-in is appropriate or not. To assess appropriateness, this paper investigates bail-in credibility among investors, as crucial condition for the credibility’s smooth implementation, by measuring the yield spread between bailinable and non-bailinable bonds.

Design/methodology/approach

The authors compare the yield spread of banks located in emerging countries that have in place a framework for the bail-in to the comparable yield spread measured for banks located in emerging countries without such framework. The comparison permits to detect whether there is a significant difference between the two spreads, which would suggest that bail-in regulation has been deemed credible by market participants where enforced, or not, which in this case would signal a problem of credibility.

Findings

The authors' results point out a significantly higher yield spread for banks located in emerging countries that have adopted a framework for the bail-in of creditors. Bail-in regulation has, therefore, being deemed credible in the adopting emerging countries, thus ensuring a crucial condition for bail-in regulation's smooth application. The authors also point out bank size and country's gross domestic product (GDP) growth as crucial moderators of bail-in expectations of market participants that can guide the implementation of bail-in rules in emerging countries.

Originality/value

This paper contributes to the literature on the credibility of bail-in with a new perspective from the emerging countries.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 28 December 2021

Huan Yang and Jun Cai

The question is whether debt market investors see through managers' attempts to hide their pension obligations. The authors establish a robust relation between understated pension…

Abstract

Purpose

The question is whether debt market investors see through managers' attempts to hide their pension obligations. The authors establish a robust relation between understated pension liabilities and corporate bond yield spreads after controlling for factors that have been previously identified as having a significant impact on firms' cost of borrowing. The results support the idea that bond market investors are not being misled by the use of high pension liability discount rates by some companies to lower their reported pension obligations. For a small fraction of debt issuers, the reported pension liabilities are larger than the pension liabilities valued at the stipulated interest rate benchmarks. For these issuers with overstated pension liabilities, bond investors adjust their borrowing costs downward.

Design/methodology/approach

The authors investigate the relation between corporate bond yield spreads and understated pension liabilities relative to long-term Treasury and high-grade corporate bond yields. They aim to answer two questions. First, what are the sizes of over or understated pension liabilities relative to guideline benchmarks? Second, do debt market investors see through the potential management manipulation of pension discount rates? The authors find that firms with large understated pension liabilities face higher marginal borrowing costs after taking into account issue-specific features, firm characteristics, macroeconomic conditions and other pension information such as funded status and mandatory contributions.

Findings

The average understated projected benefit obligations (PBOs) are understated by $394.3 and $335.6, equivalent to 3.5 and 3.0% of the beginning of the fiscal year market value, respectively. The average understated accumulated benefit obligations (ABOs) are understated by $359.3 and $305.3 million, equivalent to 3.1 and 2.6%, of the beginning of the fiscal year market value, respectively. Relative to AA-grade corporate bond yields, the average difference between firm pension discount rates and benchmark yields becomes much smaller; the percentage of firm pension discount rates higher than benchmark yields is also much smaller. As a result, understated pension liabilities become negligible. The authors establish a robust relation between corporate bond yield spreads and measures of understated pension liabilities after controlling for issue-specific features, firm characteristics, other pension information (funded status and mandatory contributions), macroeconomic conditions, calendar effects and industry effects.

Originality/value

S&P Rating Services recognizes the issue that there is considerably more variability in discount rate assumptions among companies than in workforce demographics or the interest rate environment in which firms operate (Standard and Poor's, 2006). S&P also indicates that it would be desirable to normalize different discount rate assumptions but acknowledges that it is difficult to do so. In practice, S&P Rating Services conducts periodic surveys to see whether firms' assumed discount rates conform to the normal standard. The paper makes an initial attempt to quantify the size of understated pension liabilities and their impact on corporate bond yield spreads. This approach can be extended to study firms' costs of equity capital, the pricing of seasoned equity offerings and the pricing of merger and acquisition transaction deals, among other questions.

Details

China Finance Review International, vol. 12 no. 1
Type: Research Article
ISSN: 2044-1398

Keywords

Article
Publication date: 21 September 2010

Subhankar Nayak

Although the pervasive influence of investor sentiment in equity markets is well documented, little is known about behavioral manifestations in bond markets. In this paper, we…

2078

Abstract

Although the pervasive influence of investor sentiment in equity markets is well documented, little is known about behavioral manifestations in bond markets. In this paper, we explore the impact of investor sentiment on corporate bond yield spreads. Our results reveal that bond yield spreads co‐vary with sentiment, and sentiment‐drivenmispricings and systematic reversal trends are very similar to those for stocks. Bonds appear underpriced (with high yields) during pessimistic periods and overpriced (with low yields) when optimism reigns. Consequent reversals result in predictable trends in post‐sentiment yield spreads.When beginning‐of‐period sentiment is low, subsequent yield spreads are low; high sentiment periods are followed by high spreads. High‐yield bonds (low ratings, Industrials and Utilities, extreme maturities or low durations, specially if low rated) demonstrate greater susceptibility to mispricings due to sentiment compared to low‐yield bonds. The incremental yield spread gap between highand low‐yield bonds converges subsequent to periods of low sentiment, and diverges after high sentiment. Equity attributes marginally influence the impact of sentiment on bond spreads, but mostly for distressed bonds only.

Details

Review of Behavioural Finance, vol. 2 no. 2
Type: Research Article
ISSN: 1940-5979

Keywords

Article
Publication date: 28 March 2023

Juan Chen, Hongling Guo and Zuoping Xiao

This study aims to investigate how high-speed railway (HSR) development affects urban construction investment (UCI) bond yield spreads based on China’s background.

Abstract

Purpose

This study aims to investigate how high-speed railway (HSR) development affects urban construction investment (UCI) bond yield spreads based on China’s background.

Design/methodology/approach

This study constructs a quasi-natural experiment and adopts regression analyses to empirically examine the relation between HSR development and UCI bond yield spreads. The empirical analysis is based on a Chinese sample of 15,109 bond offering observations from 2008 to 2019.

Findings

The results show that HSR development reduces UCI bond yield spreads. Mechanistic analysis shows that HSR development increases land prices and the level of urbanization, which in turn lowers the UCI bond yield spreads. In addition, the impact of HSR development on UCI bond yield spreads is more significant at higher marketization levels and lower degrees of dependence on land finance cities where UCI corporations are located.

Research limitations/implications

The results imply that transportation infrastructure improvement, such as HSR development, helps to enhance the credit of local governments and the solvency of UCI corporations and ultimately reduces the financing cost of UCI bonds.

Originality/value

This paper provides theoretical support and empirical evidence for the impact of transportation infrastructure construction on the implicit debt risks of local governments in China, which enriches the research on the “HSR economy” from a micro perspective and expands the research on the influencing factors of local governments’ debt risk.

Article
Publication date: 29 November 2018

Amrik Singh

This study aims to investigate the determinants of credit spreads in hotel loans securitized into commercial mortgage-backed securities (CMBS) between 2010 and 2015.

Abstract

Purpose

This study aims to investigate the determinants of credit spreads in hotel loans securitized into commercial mortgage-backed securities (CMBS) between 2010 and 2015.

Design/methodology/approach

The sample represents 1,579 US hotel fixed interest rate whole loans with an aggregate mortgage value of $26.6bn at loan origination. The relationship between credit spreads and property, loan and market characteristic is examined via multiple regression analysis. Additionally, the method of 2-stage least squares is used to control for endogeneity bias and identify the effect of the loan-to-value (LTV) ratio on credit spreads.

Findings

The multiple regression models explain 80 per cent of the variation in credit spreads and show a significant association of credit spreads with hotel and loan characteristics and market conditions. The findings indicate the debt coverage ratio to be the most important predictor of credit spreads followed by the loan maturity term, implied capitalization rate, LTV and yield curve. The results show the debt yield premium to be a stronger predictor of credit spreads than the debt yield ratio. The spread between the debt yield ratio and mortgage interest rate could be used in future research as an instrumental variable to identify the effect of the LTV on credit spreads.

Research limitations/implications

This study is limited to the CMBS market and the period after the financial crisis. Additional limitations include sample selection bias, exclusion of multi-property loans and variable interest rate loans.

Practical implications

Interest rate increases in an expanding economy would likely increase the cost of borrowing for hotel owners leading to higher debt service payments and lower profitability. If an increase in interest rates is offset by a decline in credit spreads, hotel owners will still benefit from the ensuing stability in borrowing interest rates. The evidence also suggests that CMBS lenders favor select service and extended stay hotels. Owners and operators of these efficient and profitable hotels will likely obtain loans with lower credit spreads given their lower risk of default.

Originality/value

The current study provides evidence on the effects of loan and property characteristics in the pricing of loan risk and serves to inform CMBS market participants about the factors that drive credit spreads in hotel mortgage loans.

Details

International Journal of Contemporary Hospitality Management, vol. 31 no. 1
Type: Research Article
ISSN: 0959-6119

Keywords

Article
Publication date: 2 July 2018

Juheon Seok, B. Wade Brorsen and Bart Niyibizi

The purpose of this paper is to derive a new option pricing model for options on futures calendar spreads. Calendar spread option volume has been low and a more precise model to…

Abstract

Purpose

The purpose of this paper is to derive a new option pricing model for options on futures calendar spreads. Calendar spread option volume has been low and a more precise model to price them could lead to lower bid-ask spreads as well as more accurate marking to market of open positions.

Design/methodology/approach

The new option pricing model is a two-factor model with the futures price and the convenience yield as the two factors. The key assumption is that convenience follows arithmetic Brownian motion. The new model and alternative models are tested using corn futures prices. The testing considers both the accuracy of distributional assumptions and the accuracy of the models’ predictions of historical payoffs.

Findings

Panel unit root tests fail to reject the unit root null hypothesis for historical calendar spreads and thus they support the assumption of convenience yield following arithmetic Brownian motion. Option payoffs are estimated with five different models and the relative performance of the models is determined using bias and root mean squared error. The new model outperforms the four other models; most of the other models overestimate actual payoffs.

Research limitations/implications

The model is parameterized using historical data due to data limitations although future research could consider implied parameters. The model assumes that storage costs are constant and so it cannot separate between negative convenience yield and mismeasured storage costs.

Practical implications

The over 30-year search for a calendar spread pricing model has not produced a satisfactory model. Current models that do not assume cointegration will overprice calendar spread options. The model used by the Chicago Mercantile Exchange for marking to market of open positions is shown to work poorly. The model proposed here could be used as a basis for automated trading on calendar spread options as well as marking to market of open positions.

Originality/value

The model is new. The empirical work supports both the model’s assumptions and its predictions as being more accurate than competing models.

Details

Agricultural Finance Review, vol. 78 no. 5
Type: Research Article
ISSN: 0002-1466

Keywords

Book part
Publication date: 19 December 2012

Iuliana Matei and Angela Cheptea

Recently the world economy was confronted to the worst financial crisis since the great depression. This unprecedented crisis started in mid-2007 had a huge impact on the European…

Abstract

Recently the world economy was confronted to the worst financial crisis since the great depression. This unprecedented crisis started in mid-2007 had a huge impact on the European government bond market. But what are the main drivers of this “perfect storm” that since 2009 affects EU government bond market as well? To answer this question, we propose an empirical study of the determinants of the sovereign bond spreads of EU countries with respect to Germany during the period 2003–2010. Technically, we address two main questions. First, we ask what share of the change in sovereign bond spreads is explained by changes in the fundamentals, liquidity, and market risks. Second, we distinguish between EU member states within and outside the Euro area and question whether long-term determinants of spreads affect EU members uniformly. To these ends, we employ panel data techniques in a regression model where spreads to Germany (with virtually no default risk) are explained by set of traditional variables and a number of policy variables. Results reveal that large fiscal deficits and public debt as well as political risks and to a lesser extent the liquidity are likely to put substantial upward pressures on sovereign bond yields in many advanced European economies.

Details

Essays in Honor of Jerry Hausman
Type: Book
ISBN: 978-1-78190-308-7

Keywords

Article
Publication date: 15 May 2017

Haitao Li, Chunchi Wu and Jian Shi

The purpose of this paper is to estimate the effects of liquidity on corporate bond spreads.

Abstract

Purpose

The purpose of this paper is to estimate the effects of liquidity on corporate bond spreads.

Design/methodology/approach

Using a systematic liquidity factor extracted from the yield spreads between on- and off-the-run Treasury issues as a state variable, the authors jointly estimate the default and liquidity spreads from corporate bond prices.

Findings

The authors find that the liquidity factor is strongly related to conventional liquidity measures such as bid-ask spread, volume, order imbalance, and depth. Empirical evidence shows that the liquidity component of corporate bond yield spreads is sizable and increases with maturity and credit risk. On average the liquidity spread accounts for about 25 percent of the spread for investment-grade bonds and one-third of the spread for speculative-grade bonds.

Research limitations/implications

The results show that a significant part of corporate bond spreads are due to liquidity, which implies that it is not necessary for credit risk to explain the entire corporate bond spread.

Practical implications

The results show that returns from investments in corporate bonds represent compensations for bearing both credit and liquidity risks.

Originality/value

It is a novel approach to extract a liquidity factor from on- and off-the-run Treasury issues and use it to disentangle liquidity and credit spreads for corporate bonds.

Details

China Finance Review International, vol. 7 no. 2
Type: Research Article
ISSN: 2044-1398

Keywords

Book part
Publication date: 29 December 2016

Mariya Gubareva and Maria Rosa Borges

This chapter reassesses the economics of interest rate risk management in light of the global financial crisis by developing a derivative-based integrated treatment of interest…

Abstract

This chapter reassesses the economics of interest rate risk management in light of the global financial crisis by developing a derivative-based integrated treatment of interest rate and credit risk interrelation. The decade-long historical data on credit default swap spreads and interest rate swap rates are used as proxy measures for credit risk and interest rate risk, respectively. An elasticity of interest rate risk and credit risk, considered a function of the business cycle phases, maturity of instruments, economic sector, creditworthiness, and other macroeconomic parameters, is investigated for optimizing economic capital. This chapter sheds light on how financial institutions may address hedge strategies against downside risks implementing the proposed derivative-based integrated treatment of interest rate and credit risk assessment allowing for optimization of interest rate swap contracts. The developed framework of integrated interest rate and credit risk management is of special importance for emerging markets heavily dependent on foreign capital as it potentially allows emerging market banks to improve risk management practices in terms of capital adequacy and Basel III rules. Analyzing diversification versus compounding effects, it allows enhancing financial stability through jointly optimizing Pillar 1 and Pillar 2 economic capital.

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