Bond Market Research Articles

Optimal Monetary and Fiscal Policies to Maximise Non-Parallel Risk Premia in Sovereign Bond Markets

In this paper, we analysed several emerging market (EM) and developed market (DM) sovereign yield curves to identify the proportion of parallel and non-parallel shifts over time. We found that non-parallel shifts are more prevalent in EM due to higher political and economic risks. Key drivers include systemic risk events like wars, debt distress, and pandemics. By backtesting a long butterfly strategy to extract non-parallel risk premia from June 2007 to March 2024, we observed that steeper slopes and greater curvature result in higher returns. We also quantified monetary and fiscal regimes to determine what types of policies are required to extract non-parallel risk premia from these sovereign yield curves. Our research suggests that countries with opposing monetary and fiscal policies possess higher return opportunities whilst countries with complementing policies require tactical butterfly strategies to optimise returns.

Empirical evidence of ESG premium in the U.S. corporate bond market: a propensity score matching approach

ABSTRACT This study aims to explore the connection between ESG scores and corporate bond performance, particularly credit spreads, by adopting a propensity score matching (PSM) approach, enabling a balanced comparison between a control group and one exposed to the ESG treatment effect. The results indicate that bonds issued between 2010 and 2020 by MSCI-rated ESG leaders across all industry sectors are priced at an average lower credit spread of 14.3 basis points (bps) relative to laggards, in the primary market. This credit spread difference persists in the secondary market and increases further when bonds of financial issuers are separated from non-financial sectors. In contrast, the impact of ESG disclosure on bond credit spread results is negligible. The willingness of investors to accept a discount on the credit spreads of a bond issued by highly rated companies offers potential incentives for broader adoption of ESG performance assessment.

Superior forecasting with simple AR(1) models in a low-volatility environment: evidence from the CAT bond market

AbstractIn the recent literature on asset pricing, advanced machine learning methods often show better predictive quality than simple linear regression models. In this context, machine learning prediction models for bond premiums are usually based on those predictors that have proved to be particularly relevant in explanatory models. However, these models do not take into account that historical premiums of assets with particularly low premium volatilities already contain a high degree of information about future premiums. With this in mind, we consider catastrophe bonds, whose secondary market premiums exhibit low volatility, and include historical premiums in our forecasting models in addition to the usual predictors. In this way, the predictive accuracy of the linear regression is significantly increased and is comparable to that of advanced machine learning methods. Remarkably, a simple linear AR(1) model without additional predictors achieves the highest predictive performance.

Zero coupon yield curve dynamics in the Russian sovereign bond market

Yield curve is a graphical representation of a relationship between interest rates and maturity. Shape of yield curve often attracts attention of analysts, because it represents market implied expectation of future interest rate path. However, the analysis of the yield curve shape often lacks theoretical foundation. It is based either on review of term spreads or on a simple visual investigation. In this article we formally define the shape of the yield curve in terms of function invariants. We use Nelson–Siegel model as a backbone for our classification and show that there exists only six possible shapes of yield curve. They are: a normal upward slopping yield curve, inverted yield curve, humped upward slopping, dipped upward slopping, humped inverted and dipped inverted. We analyze dynamics of zero coupon yield curve in Russian market based on real historical data. We show that transition from an upward slopping curve to an inverted one was always preceded by a hump at mid-tem maturities, while the transition back was always done through the dip. This highlights the importance of mid-term rates in reshapening the curve. We explain this behavior by short end of the curve being linked to the key rate and thus being more sticky. The contribution of the paper is twofold. First, it provides a formal framework to analyze the shape of the yield curve. Second, it describes the patterns in dynamic of the ruble yield curve that can be useful for bond investors in the Russian market.

Research on the effect of multiple credit ratings from the perspective of financial regulatory systems in Chinese bond market.

This paper, starting from the effects of financial regulatory policies, considers the interaction between Chengxin_Moody and Lianhe_Fitch with the dual rating system and the multi-rating system, constructs a new ordered Logit model, and attempts to explore the impact of the Notice, the dual rating system and the multiple rating system on the probability of Chinese corporate bond defaults, rating upgrades, rating downgrades, and the magnitude of credit rating migrations. This study compares the effectiveness of different rating regulatory systems. Using nine thousand two hundred and sixty-two data of Chinese corporate bonds as the research samples. Empirical analysis and robustness test reveal the following findings: (1) The issuance of the Notice has a significant positive effect on the implementation of both the dual rating system and the multiple rating system, with a greater impact on the implementation of the multiple rating system; (2) The issuance of the Notice, along with the dual rating system and the multiple rating system, can all reduce the probability of corporate bond defaults, with the multiple rating system showing the best preventive effect against corporate bond defaults; (3) The dual rating system is more effective in promoting rating agencies to adjust rating behaviors, accurately correcting corporate bond ratings and effectively alleviating the issue of rating inflation. Competition among rating agencies intensifies rating shopping; (4) Under the dual rating system, rating agencies are more likely to expand the magnitude of credit rating upgrades and downgrades, enhancing the differentiation between high-quality corporate bonds and junk corporate bonds; (5) The selection of rating information from Chengxin_Moody and Lianhe_Fitch can appropriately adjust the degree of flexibility or tightening in response to rating regulatory systems. Chengxin_Moody demonstrates a more sensitive reaction compared to Lianhe_Fitch regarding the rating regulatory systems. This study provides valuable references for the formulation and evaluation of the effectiveness of Chinese corporate bond rating regulatory policies.

Forecasting Chinese Stock Market Volatility With Volatilities in Bond Markets

ABSTRACTIn this paper, we investigate whether the bond markets contain important information that can improve the accuracy of stock market volatility forecasts in China. We use realized volatility (RV) implemented by different maturity treasury bond futures contracts to predict the Chinese stock market volatility. Our work is based on the heterogeneous autoregressive (HAR) framework. Empirical results show that the volatility of treasury bond contracts with longer maturities (especially 10 years) has the best effect on predicting the Chinese stock market volatility, both in sample and out of sample. Two machine learning methods, the scaled principal component analysis (SPCA) and the least absolute shrinkage and selection operator (lasso), are also more effective than the HAR benchmark model's prediction. Finally, mean–variance investors can achieve substantial economic gains by allocating their investment portfolios based on volatility forecasts after introducing treasury bond futures volatility.

Tail risk transmission between decomposed oil shocks and green finance markets: evidence from an EVT–TVP–VAR approach

ABSTRACT This paper provides a novel framework based on extreme value theory, i.e. the autoregressive conditional Fréchet–time-varying parameters–vector autoregression (AcF–TVP–VAR) framework, to explore the tail risk spillovers between decomposed oil shocks (supply, demand, and risk shocks) and green finance markets. The empirical results reveal that there are significant time-varying tail risk spillovers between the two markets, with spillovers intensifying during extreme events. Additionally, throughout the sample period, supply shock is found to be a net transmitter of tail risk, while clean energy market is a net receiver. Notably, the safe haven properties of green bond market are captured, indicating it can serve as a diversified investment option. The findings are important for financial investors and policymakers.

Effect of Inflation Rate on government bond yields listed at the Nairobi Securities Exchange.

This study aimed to determine the effect of inflation rates on government bond yields listed on the Nairobi Securities Exchange (NSE). The primary objective was to assess how fluctuations in inflation impact the yields of 15-year government bonds over a 16-year period, from the first quarter of 2007 to the first quarter of 2023. The study applied liquidity premium theory, as posited by Brennan (1979), which suggests that investors require a liquidity premium, or higher yield, during inflationary periods to compensate for the erosion of purchasing power in fixed-income investments. Given this theoretical framework, the research sought to quantify the relationship between inflation rates and bond yields, considering how rising inflation prompts higher yields to maintain purchasing power.The study employed a causal-comparative research design, utilizing secondary data on bond yields and inflation rates sourced from NSE and Central Bank of Kenya records. Key diagnostic tests, such as the Jarque-Bera test for normality, Breusch-Pagan-Godfrey test for heteroscedasticity, and Augmented Dickey-Fuller test for stationarity, ensured data validity and reliability. The Vector Error Correction Model (VECM) was used to analyze both short- and long-term relationships between inflation and bond yields. Findings revealed a statistically significant positive correlation between inflation rates and government bond yields, with inflation accounting for 45% of the variance in bond yields. The standardized coefficient of 0.67 suggested a moderate-to-strong association, highlighting inflation’s critical role in bond pricing. Based on these results, it is recommended that investors and policymakers closely monitor inflation trends as they influence bond yields and market performance. Further research could explore other macroeconomic factors, such as interest rates, to offer a more comprehensive view of bond market dynamics in emerging economies.

Does Greenium Exist? A Comparison between Sovereign and Corporate Bonds

Recent studies suggest that people when making investment decisions, evaluate risk according to their perception of eco-friendly commitment. These studies claim that preference to green investment influences prices and trading behaviour in market settings. Assets perceived greener on average trade at significantly higher prices with different performance between sovereign and corporate green bonds (Ehlers and Packer, 2017). Our paper refers to a sample of 5996 bond at world level divided equally in ordinary bond and green bonds. We tested a set of models to assess this new factor. The results confirm the presence of greenium, but it highlights that corporate bonds’ greenium is higher than sovereign one. Moreover, in developed markets, green bonds tend to exhibit characteristics of a greenium, whereas, in emerging markets, the environmental aspect is still developing. This observation supports the notion that greenium is more pronounced in mature markets with heightened environmental sensitivity. Differently from previous studies, we filter the model for bonds issued during the Covid19 pandemic and not, and the results suggests the presence of a greenium only in normal times (Zerbib, 2019a, 2019b). The analysis contributes to the research on the green bond market and its dynamics. We prove that greenium is not universally present or significant, especially in emerging markets. These insights are relevant for investors and policymakers considering the implications of green finance for sustainable development and climate change mitigation.

Критерії відповідності фінансового менеджменту емітента зелених облігацій

Introduction. A fundamental principle in the green bond market is the financing of projects that have a positive impact on the environment. Socially responsible investors want to be sure that the proceeds from the issuance of these securities are used as intended, and that the projects being financed contribute to the achievement of environmental goals. For this purpose, the relevant international standards have already been adopted on the green bond market. Problem Statement. In the green bond market, manipulation often occurs when the proceeds from the issuance of these securities are allocated to projects that are not actually environmentally friendly, although they are portrayed as such. Compliance of the financial management of the issuer of green bonds with generally accepted standards is always in the focus of attention of socially responsible investors. An urgent task is to measure the compliance of financial management with generally accepted standards, which will affect the future results of the issuer of green bonds in the distribution of income to achieve environmental goals. Purpose of the article is to identify the criteria for compliance of the green bond issuer's financial management with internationally recognized standards. Methods. The following research methods were used: the generalization method (when studying theoretical sources, scientific works of famous scientists and researchers on selected issues); methods of comparisons and synthesis (during the review of international acts, existing practices and standards), the method of analysis (to identify the criteria of compliance of financial management in the green bond market); logical method (for forming conclusions). Results. The article reveals the concept and features of financial management in the green bond market, examines global practices and standards for managing proceeds from the issuance of these securities. The principles and requirements that issuers of green bonds on the global and European markets should follow are summarized. On the basis of the conducted research, the criteria of compliance of financial management in the market of green bonds are singled out. Conclusions. The principles and methods contained in international standards and recommended acts on the green bond market provide a basis for measuring the compliance of the issuer's financial management with internationally recognized practices. The conducted research made it possible to single out the following criteria: 1) the ability to properly select and evaluate projects; 2) confirmation of the targeted direction of income; 3) availability of separate accounting of receipts; 4) organization of control over revenue management; 5) involvement of an independent third party in the control. Identified financial management compliance criteria make it possible to identify the green bond issuer's strengths and weaknesses for further improvement of its internal practices, increase transparency, and improve management processes and foundations. Checking the issuer of green bonds according to each of the criteria on a point basis allows establishing the general level of compliance of its financial management with the expectations of socially responsible investors.

Monetary and Fiscal Policy Impacts on the Indian Sovereign Bond Market: A VAR Approach

This study analyses the dynamic relationship between yield curve behaviour and the macroeconomy in India, with a focus on both monetary and fiscal policy impacts. Using the monthly data on yields of Treasury bills and government securities from April 2000 to March 2020, we employ principal component analysis to extract the three yield curve factors—level, slope and curvature. We then use an unrestricted vector autoregressive model to analyse the relationship between these three yield curve factors and macroeconomic variables: inflation, GDP growth, exchange rate and monetary and fiscal policy indicators. Our findings reveal a bidirectional causality between yield curve factors and macroeconomic variables. Monetary policy plays an important role in shaping the yield curve, with short-term rates having more pronounced effects than long-term rates. Notably, this study is among the first to incorporate fiscal policy indicator in the Indian context, providing a more comprehensive understanding of policy impacts on the sovereign bond market. Our results offer valuable insights for policymakers and investors, showing the interrelationship of fiscal and monetary policies with bond market dynamics in emerging economies. This research contributes to the growing macrofinance literature and enhances our understanding of financial market dynamics in a developing economy. JEL Classification: E430, C32, G120, E44

Низкоуглеродное развитие России: вызовы и возможности в новых условиях

Russiaʼs model of economic development, based on hydrocarbon exports, initially determined the countryʼs scepticism to- ward low-carbon transformation. However, the growing negative effects of climate change, manifesting in increased natural disasters (floods, fires, extreme heat), as well as extraterritorial measures imposed by major trading partners, which could potentially limit market access, led to a transformation of the perceived climate change challenge and the adoption of a range of policy documents and regulations to articulate and implement a low-carbon development policy in Russia. The targets and measures have been criticized for lacking ambition and rigour, but still pushed the processes without which the economy would continue to face the negative effects of climate change and increasing constraintsin global markets. The geopolitical crisis of 2022 and widening sanctions have significantly constrained Russiaʼs ability to meet climate targets. Despite this, mechanisms to promote decarbonization in key sectors continue to be developed. In addition, opportunities for cooperation with some major non-western economies have not closed. This article analyzes Russiaʼs strategic documents and key low-carbon development policies, including the activities of major companies. It provides perspective on the role of forest climate projects as well astheir drawbacks and risks, the Sakhalin experiment to achieve carbon neutrality in the region and how it is implemented through concrete initiatives, the prospects and limitations of the hydrogen industry, the challenges and tools for decarbonizing transport, state of play in the carbon capture, use and storage technologies, the criteria for green projects, and the situation on the green bond market. It also identifies two important areas which gain importance as the climate transition scales up: nuclear power and the ex- traction and production of critical raw materials. Based on the analysis, recommendations are given on promising areas of cooperation between Russia and its BRICS and EAEU partners.

The real impacts of third-party certification on green bond issuances: Evidence from the Chinese green bond market

This study examines the real effects of third-party certification on green bond issuance by Chinese listed firms over the period 2016–2022. Our findings reveal that the issuance of certified (non-certified) green bonds results in favourable (non-significant or even negative) stock market reactions in both the short and long term, indicating that third-party certification adds value for stock investors. In addition, we analyse the underlying mechanisms that drive the value creation of third-party certification in green bond issuance. We find that third-party certification effectively reduces information asymmetries between firms and investors, induces firms to genuinely prioritise sustainable practices and improves firms' environmental performance, leading to increases in investor demand and firm value. Our further analysis reveals that third-party certification helps green bond issuers attract long-term investors, increases analyst coverage and induces positive opinions from the regulator on firm disclosure. Overall, this study documents that third-party certification of green bond issuers can generate real economic and environmental benefits for issuers.

African Sovereign Risk Premia and International Market Assets: A Relook Under The COVID-19 Outbreak

Using the wavelet multiscale coherence technique, the paper examines the interdependences between global market assets, sovereign credit default swap (CDS) and yield-to-maturity on bond spread for African economies from January 2019 to March 2023. The empirical results primarily reveal a high level of coherence between global market assets and Africa’s sovereign CDS and yield-to-maturity, although varying across countries and time-frequency domain. Notably, the high degree of coherence and the positive co-movement between sovereign CDS and global market assets are more concentrated at the medium and upper frequency bands. The observed intensity of co-movements between global market assets and sovereign CDS/yield-to-maturity (YTM) of bond spread, with global market assets broadly serving as leading variables, suggests that an increased global investor’s risk aversion positively affects the yields on Africa market bonds. Among the global market assets, we identified that VIX (which is implied volatility of S&P500) has the dominant influence on Africa sovereign CDS/YTM compared to that emanating from Bitcoin and Godman Sachs Commodity Index. This is highly conceivable as VIX gauges bubbling global risks and uncertainties which considerably influences investor’s risk aversion. The heterogeneous lead/lag dynamics also provide useful information to global investors, including by utilizing African markets to rebalance their portfolios for risk management purposes. The empirical findings thus provide further critical information to investors for hedging purposes, and to policymakers in formulating sovereign risk management policies oriented towards minimizing sovereign default risks.

Drivers of Portfolio Flows into Chinese Debt Securities Amidst China’s Bond Market Development

Abstract The paper focuses on China’s onshore bond market and the drivers of non-resident net portfolio flows into Chinese debt securities. Following a review of China’s bond market, a simple theoretical model of push and pull factors driving bond flows is built. It represents a foundation for the empirical analysis on drivers of bond flows into China. Static and time-varying models are estimated to explain the importance of push and pull factors in China’s bond market. While China-specific pull factors, such as domestic economic growth and asset returns, are important drivers of flows, the results reveal that global push factors, such as US interest rates and risk aversion, have recently gained significance as drivers of flows into China. The results confirm China’s continued bond market deepening and integration with the rest of the world, which may have financial stability implications. Therefore, increased awareness regarding bond market developments in China is warranted.

The Too-Big-to-Fail Premium in Tier-2 Capital Bonds and Additional Tier-1 Capital Bonds Primary Markets: Evidence from China

Abstract This study examines the too-big-to-fail expectations in the primary market issuance spreads of commercial bank tier-2 capital bonds and additional tier-1 capital bonds in China. Using a sample of 574 issuances with total amount of 4.76 trillion RMB (749 billion USD), we conduct median regressions with the issuance spreads as the dependent variable. The coefficients of DSIB and GSIB are negative and statistically significant at 1% and 5% levels respectively in the full sample, and are negative and statistically significant at 1% level in the subsample after the guidance on asset management businesses was announced. Ceteris paribus, the issuance spreads of capital bonds of systemically important banks are 15.2 bps to 19.7 bps lower than those issued by other banks. The too-big-to-fail expectations and implicit guarantee of systemically important banks in the Chinese bond market, which narrow the primary market spreads of capital bonds issued by systemically important banks, may account for the results. To address the potential endogeneity issues, we use 90% quantile and 95% quantile of sample bank consolidated assets as proxies of systemic importance, and use China Development Bank bond yields to calculate issuance spreads, and the results show that the conclusion is robust.

DETERMINAN SISI PENAWARAN GREEN BONDS ASEAN

The explicit objective of this study is to analyze the factors influencing the supply side of Green Bonds in ASEAN countries. This research aims to examine how the characteristics of green bonds and the characteristics of issuing companies affect the amount of green bonds issued in ASEAN countries, particularly in Malaysia, Singapore, Thailand, and the Philippines during the period from 2018 to 2021. This study employs a quantitative research design with a linear regression analysis approach using the Ordinary Least Squares (OLS) method. This design was chosen to identify and measure the relationship between the independent variables (green bond characteristics and issuer company characteristics) and the dependent variable (the amount of green bonds issued). The independent variables in this study are Green Bond Characteristics, proxied by coupon rates and risk premiums. Additionally, the study includes the variable Issuer Company Characteristics, proxied by the debt ratio of the issuing company. The dependent variable in this study is the amount of green bonds issued. This research utilizes panel data that encompasses green bonds issued in four ASEAN countries (Malaysia, Singapore, Thailand, and the Philippines) from 2018-2021. This panel data allows for analysis that accounts for variability over time and across different companies or countries. The findings of this study indicate that there is a significant relationship between the characteristics of green bonds and the characteristics of issuing companies with the amount of green bonds issued in ASEAN countries. Specifically, it was found that green bond characteristics such as coupon rates and risk premiums significantly impact the amount of green bonds issued. Higher coupon rates and higher risk premiums tend to reduce the amount of green bonds issued. Additionally, the characteristics of the issuing companies, particularly the debt ratio, were also found to have a significant influence on the amount of green bonds issued. Companies with higher debt ratios tend to issue more green bonds. Overall, this study identifies key factors influencing the supply of green bonds in ASEAN and provides insights that can support the development of policies and strategies to strengthen the green bond market in the region

Simulation of the growth and yield of the species Gmelina arborea Roxb

Forests are being threatened worldwide mainly due to the increase in demand for wood and that more than 50% is extracted from them. This is largely because forest plantations grow at a slow rate and supply the market. Given that, one of the fundamental goals of forestry research is the construction of growth and yield models to be used as a planning tool. In this way, the proposal of this work is to show how through the modeling and simulation of the growth of a forest stand, the uncertainty of investors is reduced because it allows to quantify the production of wood that will be obtained. The study was based on data obtained from inventories conducted between 2012 and 2015 in 31 permanent plots of Gmelina arborea Roxb., located in three municipalities of Tolima: Armero, Coello, and Guamo. Based on the inventory data, three regression models were implemented. These results will be particularly useful for silvicultural management planning since the implemented methodology can be applied in other regions of the world and with other varieties of forest species. As an additional stimulus for investors, in the simulation it is possible to quantify carbon capture in a technical way to be offered in the carbon bond market.

Geopolitical turmoil and investor green preference: Evidence from the corporate bond market

In this study, we analyze a sample of 1,630 corporate green bonds issued internationally between November 2012 and January 2024 to investigate the yield differences between green and non-green bonds. Our findings reveal a small greenium, particularly significant in the secondary market among carbon-intensive industries, first-time green bond issuers, and riskier issuances. We show that Geopolitical Risk (GPR) significantly influences the greenium in the secondary market, primarily driven by geopolitical acts rather than threats. Additionally, we establish that third-party certifications and corporate exposure to environmental risk are critical in explaining the GPR-greenium relationship. These results underscore the importance of GPR in enhancing investor preference for green bonds, offering important implications for both practice and policy.

Research On Bond Market in Risk Management

With a focus on the acquisition and disposal of bonds and other fixed-income instruments, the bond market is a significant division of the financial markets. This article focuses on the definition and classification of bond risk and evaluates the impact of bond risk on investors and the market by first analyzing the history of the bond market and its role for investors. In addition, this paper discusses some strategies and case studies that people use to avoid, transfer, or reduce risks in the bond market, through some integrated risk management strategies, such as hedging strategies, risk diversification, and credit enhancement, by studying typical cases, investors can understand the main risks in the bond market, master how to distinguish and manage risks and strategies, analyze the more complex bond market, and analyze the complex integrated risks are summarized and recommended to maximize returns. Ultimately, readers may gain a deeper understanding of the bond market.