Bond Returns Research Articles

Green Bond Issuance and Corporate Investment and Financing Level: Evidence from Chinese Listed Companies

After the formation of the Chinese green bond market in 2016, it rapidly developed. However, there have been relatively few studies in academia on the financial performance of enterprises after issuing green bonds. In order to promote the development of the green bond market and guide enterprises to improve their investment and financing decisions, this paper uses panel data of A-share listed companies and green bond issuing companies from 2012 to 2022 as samples to study the impact and mechanism of green bond issuance on the investment and financing behavior and maturity mismatch of enterprises. The conclusion drawn is that green bond issuance significantly promotes the improvement of enterprises' investment and financing capabilities, and it also reduces the degree of maturity mismatch for enterprises. This conclusion passes the parallel trends test and remains robust after controlling for the effects of corporate financial asset allocation, industry time trends, and excluding competitive hypotheses. Through mechanism research, it is found that green bonds can improve the level of enterprise investment and financing and the degree of maturity mismatch by reducing the degree of financing constraints on enterprises. They can also enhance enterprise investment and financing capabilities by changing market sentiment and alleviate the maturity mismatch of investment and financing.

Conflict fuels inflation but the tinder lies elsewhere: Eclectic structuralist thoughts in a developing economy context

AbstractDeveloping country inflation is in the headlines again. Mainstream macroeconomics typically ignores the role of conflict while non‐mainstream work tends to ignore macroeconomic constraints. This paper revisits the issue employing a dependent economy framework with eclectic characteristics. Specifically, I explore the mechanisms that propagate both real and monetary sources of inflation in the presence of real wage resistance and distributional conflict. The analysis shows that the inability to pay for subsidies with taxes or bond issuance in a stylized developing economy could create a situation where a relatively small shock leads to sustained and accelerating inflation and a wage‐price spiral, thanks to conflicting claims on income. Subsidies to protect consumers from external price shocks could, similarly, leave a country vulnerable to accelerating wage‐price spirals as the stabilizing relative price effects of a declining foreign asset position are dampened. Distributional conflict thus plays the role of sustainer rather than the primum mobile. Price controls could, in theory, better enable inflation management if these do not result in redistribution toward spenders. Such controls, however, create other trade‐offs for countries facing balance‐of‐payments fragility.

Trading Activity in the Corporate Bond Market: A SAD Tale of Macro-Announcements and Behavioral Seasonality?

This study investigates the determinants of trading activity in the U.S. corporate bond market, focusing on the effects of Seasonal Affective Disorder (SAD) and macroeconomic announcements. Employing the General-to-Specific (Gets) Autometrics methodology, we identify distinct behavioral responses between retail and institutional investors to SAD, noting a significant impact on retail trading volumes but not on institutional trading or bond returns. This discovery extends the understanding of behavioral finance within the context of bond markets, diverging from established findings in equity and Treasury markets. Additionally, our analysis delineates the influence of macroeconomic announcements on trading activities, offering new insights into the market’s reaction to economic news. This study’s findings contribute to the broader literature on market microstructure and behavioral finance, providing empirical evidence on the interplay between psychological factors and macroeconomic information flow within corporate bond markets. By addressing these specific aspects with rigorous econometric techniques, our research enhances the comprehension of trading dynamics in less transparent markets, offering valuable perspectives for academics, investors, risk managers, and policymakers.

The role of green bonds in reducing CO2 emissions: a case of developing countries

PurposeThe global economy is growing very fast, and it is also facing environmental challenges. Due to increased economic activities, global warming is rising as a result of greenhouse gas emissions. Concepts like green finance and green investments are emerging to battle climate issues. The present study empirically examines the impact of green bonds on carbon dioxide (CO2) emissions in developing countries, as these countries are producing 63% of CO2 emissions around the globe.Design/methodology/approachTo check this impact, pooled ordinary least squares (OLS), fixed effect and generalized method of moments (GMM) techniques are applied using the annual data of 65 developing countries from 2008 through 2021.FindingsThe results indicate that the overall effect of green bonds on CO2 emissions is negative, as more issuance of green bonds reduces CO2 emissions, confirming results from the existing empirical literature. The study found that more foreign direct investment (FDI) and urbanization lead to more CO2 emissions, while increase in trade openness helps reduce CO2 emissions. It was found that promoting green bonds will help to promote environmentally friendly projects that will help to reduce CO2 emissions. Rapid urbanization has led to more energy demand for various industries like manufacturing, transportation and residential sectors, which leads to more CO2 emissions.Practical implicationsThe policymakers in these countries should make policies that help in reducing carbon emission by increasing green bonds and FDI in supporting projects that are environmentally friendly. Therefore, to mitigate such current and future issues, policymakers in developing countries need to give serious attention to this area to fulfill sustainable development goals.Originality/valueThis study presents a pioneering examination of green bonds and CO2 emissions in 65 lower- and middle-income countries (developing countries). We have tried to cover all developing countries that are causing more greenhouse gas emissions and need to shift to green finance strategies. It will be a contribution to the body of knowledge regarding the role of green bonds in reducing CO2 emissions. The present study will help in assessing the importance of green bonds in bringing low-carbon economies.

Cry wolf and it appears: Debt ceiling debates and new corporate bond issues

We provide evidence that attention to debt ceiling debates affects the pricing of new corporate bond issues. Measuring public attention by using data from the Google Search Volume Index with the keyword “debt ceiling,” we find an increase in bond yields for non-investment grade short maturity issues at times of high attention. Further analysis suggests that the results are likely not due to changes in uncertainty or risk aversion, rather, to attention spillover to lower quality firm's short-term financing needs.

A multistage forecasting model for green bond cost optimization with dynamic corporate risk constraints

AbstractThis study develops a multi‐stage stochastic model to forecast the issuance of green bonds using the Filtered Historical Simulation (FHS) method to identify the most cost‐effective conditions for issuing these bonds amid various risk factors. Drawing on historical yield data and financial metrics of corporate green bonds from December 2014 to June 2023, the model considers fluctuating elements such as risk probabilities, financial risks in worst‐case scenarios, and liquidity risks at upcoming issuance moments. Our findings reveal the model's effectiveness in pinpointing the lowest possible costs of issuing new green bond portfolios in the future, while also addressing expected financial risk, risk occurrence probability, and liquidity issues. The results provide issuers with the insights needed to accurately time the market, tailor bond maturities according to a corporation's future risk profile, and enhance liquidity management. Notably, our model indicates that refining the estimated probability of future risk occurrences can lead to significant savings in green bond issuance costs. This approach allows for adaptable bond issuance strategies, addresses inherent debt, and enables detailed risk management, offering substantial benefits for green enterprises navigating the complexities of future financial landscapes.

Bilateral investment treaties and sovereign default risk: Evidence for emerging markets

AbstractThis paper analyses the impact of bilateral investment treaties (BITs) on sovereign default risk using monthly data for 29 emerging markets from 1996 to 2016. Under a BIT, foreign investors can use an international arbitration scheme to enforce compensation claims against the host country's government. We focus on the so far unexplored legal risk associated with BITs since a higher likelihood of government expropriations implicitly increases public debt. We do not find a significant unconditional effect of BITs on sovereign default risk (measured by the month‐over‐month percentage change in a country's Emerging Market Bond Index). Considering the heterogeneity of BITs and political risk, we find robust and strong negative effects of BITs on sovereign bond returns. In countries with high political risk of expropriation (measured by low executive constraints), we find that the implementation of BITs with strong investor protection is associated with a significantly negative impact on sovereign bond returns (−0.45 percentage points), which compares to roughly 11.7% of bond returns' monthly standard deviation.

Research on the Impact of ESG Disclosure on Green Bond Issuance in New Energy from the Perspective of Carbon peak

With the goal of carbon peaking, low-carbon green development has become the main theme of economic development. In this context, while pursuing economic benefits, it is also necessary to take into account environmental benefits. Industrial development policies and matching funding strategies related to low-carbon green are called for, and sustainable economic strategies will make the industry move forward steadily. On the basis of foreign scholars' research on green bonds and industrial ESG, this project is based on the new energy industry, organizing and researching the information disclosed by its ESG, exploring in depth the influence of this information on the issuance of green bonds by the new energy industry, and exploring whether there is any positivity in this influence. The ESG information disclosed by the new energy industry can, on the one hand, help investors better understand ESG governance and the green bond market in the new energy industry, and guide them to make rational investments; on the other hand, it can help the government better formulate policies to improve the perfection of the green bond-related standards, including the evaluation system and certification system, as well as the quality of the industry's information disclosure.

Empirical Evidence on the Stock–Bond Correlation

The correlation between stock and bond returns is a cornerstone of asset allocation decisions. History reveals abrupt regime shifts in correlation after long periods of relative stability. We investigate the drivers of the correlation between stocks and bonds and find that inflation, real rates, and government creditworthiness are important explanatory variables. We examine the implications of a shift in the stock–bond correlation and find that increases are associated with higher multi-asset portfolio risk and higher bond risk premia.

Dealer inventory and the cross-section of corporate bond returns

We empirically study the role of dealers’ inventory risk in US corporate bond returns. To do so, we build a bond-level measure of exposure to inventory risk and find that the risk-adjusted return of a high-minus-low portfolio is 21 basis points per week. The inventory risk premium is amplified during times of crises, if hedging supply is low, as well as for bonds with higher credit risk. Our findings provide strong support for the asset pricing implication of inventory models and show that dealers use price pressure to compensate for bearing inventory risk.

The value effect of sustainability: evidence from Latin American ESG bond market

ABSTRACT We use the event study methodology to examine the effect of 115 environmental, social, and governance (ESG) bond issuances on the stock price of Latin American listed firms over the period 2016–2022. Consistent with the signaling theory, firms sending a signal of commitment to sustainability obtain a positive and significant average Cumulative Abnormal Return (CAR) of 1.97% during an event window of 18 days. The CAR is higher for first-time issuers, reaching 2.28%. Firms with smaller and more diverse boards are associated with higher CARs. However, ownership concentration reduces the CARs due to the potential misbehavior and expropriation risk from controlling shareholders. These results suggest that firm-level corporate governance mechanisms are critical to the ESG bonds signaling effect. Overall, our findings indicate that investors in Latin American capital markets positively value the reduction of information asymmetries regarding firms’ sustainability efforts, especially in a firm that mitigates potential agency conflicts.

Should School Buses Be Green? A Sustainability Decision-Making Case Study

ABSTRACT The Director of Transportation for Grenze Independent School District wants to transform the bus fleet to clean energy, but budget constraints are a constant barrier. The health and safety of pupils, particularly those with asthma, is a compelling feature of this case to engage students and explore the benefits and challenges of electric vehicles. The purpose of this case study is to encourage students to consider all stakeholders when analyzing data for business decision-making, thus utilizing the triple bottom line. Learning objectives for Module 1 are to (1) analyze financial data for optimal decision-making, (2) identify and describe environmental and social concerns, and (3) evaluate and support recommendations considering financial, environmental, and social factors. Module 2 learning objectives focus on governmental accounting concepts to (4) analyze the impact of bond issuance on taxpayers, (5) prepare related journal entries, and (6) explain the reporting of transactions on fund-based and government-wide statements.

Corporate Bond Issuance Over Financial Stress Episodes: A Global Perspective

We use a merged global data set of security-level corporate bond issuance and firm-level financial statement data to show that, in contrast to earlier periods of financial stress, during the COVID pandemic nonfinancial firms around the world were more likely to issue bonds, driven by a boom in local-currency-denominated issuance. We observe a distinct cross-regional difference in the characteristics of issuing firms, finding that in advanced economies issuance during COVID was driven by less risky firms, as predicted by existing theories; in emerging markets, only issuance of U.S. dollar denominated bonds came from larger or less risky firms.

COVID-19 and the transformation of emerging economies: Financialization, green bonds, and stock market volatility

The COVID-19 pandemic has brought about significant changes in the economies of emerging markets, particularly the E−7 economies. This research analyzes the impact of the pandemic on the financialization of oil prices, green bond issuance, and the stock market in these economies by using ARCH-LM analytics, the researchers can determine if the profit sequence at delay 10 exhibits heteroscedasticity at ***p < 0.01. The research period is conducted during March 1, 2017–June 30, 2022 to analyze the results before and during COVID-19 in E−7 countries. The financialization of oil prices has resulted in increased volatility and fluctuations in the stock market, highlighting the importance of understanding the role of financialization in market dynamics. The pandemic has also spurred a rise in issuing green bonds, indicating a shift towards sustainable finance and a recognition of the importance of environmental sustainability in economic recovery. In particular, China's leadership in green bond issuance underscores the growing trend towards sustainability in emerging markets. The findings of this research contribute to the growing body of literature on the impact of the pandemic on the global economy, highlighting the unique challenges and opportunities facing emerging markets. This study concludes with recommendations for policymakers and investors seeking to navigate these shifting market dynamics and foster sustainable economic growth in the E−7 economies.

Do City Governments Manage their Financial Data Prior to Issuing Bonds

Governmental Accounting Standings Board (GASB) Statement No. 34 requires financial reporting for state and local governments. The motivation behind GASB 34 was to make governmental financial reports more comprehensive and transparent. Until its implementation, data on state and local governments was not reported consistently from entity to entity. This paper extends the earnings management literature to include municipalities and funds management. In particular, earnings cannot be reported in governmental units. Instead, Changes in Fund Balance is used. Thus, a unique contribution is the use of earnings management models to test Fund Balance management. We use a version of the Jones model (Meisel, 2007). Specifically, we test whether city governments manage their financial data for events such as debt or bond issues to achieve certain benchmarks. We find that cities are motivated to manage their financial information lower in the year just before the bondissue.

COAALA: A Novel Approach to Understanding Extreme Stock–Bond Comovement

Abstract This article proposes a novel copula model to understand the dependence between extreme variations in stock and government bond returns. This model is used to introduce a tail-based extension of the safe haven concept, which we refer to as a tail risk dampener. Our findings reveal significant cross-country differences in stock–bond local tail dependence and tail risk dampening abilities. Some countries’ bond market can lessen the impact on portfolio returns of extreme negative stock returns, while for others no such negative tail comovement is found. This tail comovement is also not always aligned with global comovement between stocks and bonds. The article concludes that a comprehensive understanding of the comovement and the resulting diversification potential between stock and bond returns necessitates complementing global measures of dependence with local tail measures.

Central bank policies and green bond issuance on a global scale

We employ recently released IMF data to examine the impact of central bank supervision policies on green bond issuance in sixty-six countries during 1992–2021. We introduce three novel metrics to assess central banks' supervisory authority: the breadth of their supervision mandates, the intensity of monitoring and enforcement, and the power of utilization of systemic risk tools. Countries with central banks possessing broader supervisory mandates and actively employing systemic risk tools are broadly associated with higher overall values of green bond issuance. Conversely, higher monitoring and enforcement intensity is associated with lower issuance values. These effects are pronounced in the realm of private green bond issuance and less prominent in government bond issuance where the government has a strong role. While the efficient functioning of financial institutions and the quality of ratings play crucial roles, inflation does not seem to have a significant impact on green bond issuance. Our results remain robust through sensitivity tests and endogeneity analyses. Developed countries primarily rely on central bank monitoring and enforcement intensity as the dominant policy variable, whereas developing countries lean more towards the central bank mandate as the influential policy variable.

Foreign trade and China’s yield curve during the COVID-19 pandemic: An analysis based on an extended arbitrage-free Nelson–Siegel model

We propose a general extension of the arbitrage-free Nelson–Siegel (AFNS) model by incorporating exogenous factors into the unspanned AFNS model. Regarding the number of people newly diagnosed with COVID-19 as an exogenous shock and net foreign purchases of treasury bonds of different maturities as unspanned factors, we study the impacts of the COVID-19 pandemic and the trading behavior of foreign investors on the yield curve in China. Our empirical results show that the COVID-19 pandemic significantly increases net foreign purchases of short-to-medium-term treasury bonds while significantly reducing the long-term treasury yield. Net foreign purchases of treasury bonds of different maturities cause large shifts with different shapes in the yield curve and have different effects on the excess returns of bonds of different maturities. This paper provides an important reference for risk management, investment decision-making and risk assessment of China’s financial opening policy for its treasury bond market.

Green bond issuance and green innovation: Evidence from China's energy industry

This paper investigates the impact of green bond issuance on green innovation and the associated mechanisms in China's energy industry. Using the panel data of Chinese listed energy firms in the A-share market from 2010 to 2022, we construct a difference-in-differences (DID) model to access relevant empirical results. The results suggest that green bond issuance contributes to both the quantity and quality of energy firms' green innovation and, from the perspective of the quantitative and structural effects of corporate funding, we find that alleviating financing constraints and the maturity mismatch between investment and financing are the two potential channels for this effect. Moreover, we find that the driving effect of green bond issuance on green innovation is more pronounced for larger energy firms, firms in the clean energy sector, eastern energy firms, and those with weak entrepreneurial R&D initiatives.

Prediction and Allocation of Stocks, Bonds, and REITs in the US Market

AbstractThis study employs dynamic model averaging and selection of Vector Autoregressive and Time-Varying Parameters Vector Autoregressive models to forecast out-of-sample monthly returns of US stocks, bonds, and Real Estate Investment Trusts (REITs) indexes from October 2006 to December 2021. The models were recursively estimated using 17 additional predictors chosen by a genetic algorithm applied to an initial list of 155 predictors. These forecasts were then used to dynamically choose portfolios formed by these assets and the riskless asset proxied by the 3-month US treasury bills. Although we did not find any predictability in the stock market, positive results were obtained for REITs and especially for bonds. The Bayesian-based approaches applied to just the returns of the three risky assets resulted in portfolios that remarkably outperform the portfolios based on the historical means and covariances and the equally weighted portfolio in terms of certainty equivalent return, Sharpe ratio, Sortino ratio and even Conditional Value-at-Risk at 5%. This study points out that Constant Relative Risk Averse investors should use Bayesian-based approaches to forecast and choose the investment portfolios, focusing their attention on different types of assets.