Bond Market Research Articles

ANALYZING THE DETERMINANTS OF BOND MARKET DEVELOPMENT IN NIGERIA

<span>This study examines the key factors influencing the development of Nigeria’s bond market using time series data from 1981 to 2022. While employing quantitative methods, the study identifies a strong long-term relationship between key economic variables and bond market development. Major findings highlight the critical roles of inflation, fiscal deficit, foreign direct investment, and per capita income in shaping market growth. The study provides practical policy recommendations, including measures to boost market liquidity, improve transparency, and promote public-private partnerships for sustainable bond market development. These findings contribute significantly to understanding the dynamics of emerging bond markets and their potential for economic development in Nigeria.</span>

The Impact of the Russo-Ukrainian War on the International Sovereign Debt Market: The Role of Trade Channel

The paper quantifies the impact of the outbreak of the Russo-Ukrainian war on sovereign bond yields for 58 countries. Our findings based on event study methodology and multivariate cross-sectional regression analysis highlight the salient role of trade channel in shaping the markets’ reaction to the hostilities. The uptick in yields was higher in countries with a greater share of agricultural raw materials imports from Ukraine. No other persistent cross-geography differences in market reactions were found. The strength of the reaction was contingent on the individual countries’ macroeconomic conditions. The post-event cumulative abnormal returns exhibited a positive associative link with the baseline inflation in the studied countries pointing to the inflationary pressure portended by the outbreak of war. No statistically significant links between the ex ante situation on the labor market and the subsequent bond market reaction were observed. At the outset of hostilities, the dynamics of yields were driven by the perceived likelihood of escalation, while at later stages, the trade channel appears to have shaped the market response. The paper provides insights into the factors shaping the spillover effects of the war on fixed-income markets and quantifies the speed of market adjustment in response to an external shock.

Effect of Market-Wide Investor Sentiment on South African Government Bond Indices of Varying Maturities under Changing Market Conditions

The excess levels of investor participation coupled with irrational behaviour in the South African bond market causes excess volatility, which in turn exposes investors to losses. Consequently, the study aims to examine the effect of market-wide investor sentiment on government bond index returns of varying maturities under changing market conditions. This study constructs a new market-wide investor sentiment index for South Africa and uses the two-state Markov regime-switching model for the sample period 2007/03 to 2024/01. The findings illustrate that the effect investor sentiment has on government bond indices returns of varying maturities is regime-specific and time-varying. For instance, the 1–3-year government index return and the over-12-year government bond index were negatively affected by investor sentiment in a bull market condition and not in a bear market condition. Moreover, the bullish market condition prevailed among the returns of selected government bond indices of varying maturities. The findings suggest that the government bond market is adaptive, as proposed by AMH, and contains alternating efficiencies. The study contributes to the emerging market literature, which is limited. That being said, it uses market-wide investor sentiment as a tool to make pronunciations on asset selection, portfolio formulation, and portfolio diversification, which assists in limiting investor losses. Moreover, the findings of the study contribute to settling the debate surrounding the efficiency of bond markets and the effect between market-wide sentiment and bond index returns in South Africa. That being said, it is nonlinear, which is a better modelled using nonlinear models and alternates with market conditions, making the government bond market adaptive.

Corporate Bond Market Distress

Corporate Bond Market Distress

Do Investors’ Site Visits Improve Bond Market Pricing Efficiency? —An Empirical Study from the Secondary Bond Market

ABSTRACT Taking bonds issued by A-share companies listed on the Shenzhen Stock Exchange from 2014 to 2020 as a sample, this paper explores the effect of corporate site visits on bond trading spreads. The study finds that the more investors visit a given firm, the lower the trading spreads of bonds issued by that firm, and this phenomenon is more pronounced in companies with greater information asymmetry or agency conflicts. Further research shows that investors evaluate the financial status of the company more accurately through site visits and reduce irrational decisions caused by information uncertainty. Consequently, site visits reduce the financing gap caused by macroeconomic factors. The results show that personal communication between investors and listed companies could provide effective information for bond investors and reduce their information risk. This paper expands the existing research on issues related to secondary bond market pricing and investors’ site visits and provides important empirical evidence for regulators to use to further optimize the bond market disclosure system to reduce information asymmetry.

Mandatory audit partner rotation and earnings informativeness in the bond market

AbstractThis study finds that mandatory rotation of engagement partners results in more positive earnings response coefficient (ERC) in the years immediately following rotation than in the years that are not. Further analysis reveals that the positive association is driven by firms that announce bad earnings news and for bonds with longer maturity terms. Furthermore, such positive association is stronger when the incoming engagement partner has more industry expertise than the leaving partner, when the audit firm is a non–Big 6 auditor, and when the client firm is small. Finally, the relationship does not exist for voluntary partner rotation.

On the valuation skills of corporate bond mutual funds

Abstract The corporate bond market is larger, more illiquid, and presumably less efficient than the equity market. These features provide numerous profit opportunities for corporate bond mutual funds that are unique to the corporate bond market. However, whether corporate bond mutual funds have the valuation skills needed to take advantage of these opportunities is unclear. We introduce a novel measure to assess the valuation skills of investment-grade corporate bond mutual funds, which we refer to as the valuation accuracy score (VAS). VAS recognizes funds holding more underpriced and less overpriced corporate bonds as ex-ante having better valuation skills. It predicts future fund performance, is stable over time, and is unrelated to other sources of skill. Investors chase the performance of higher-VAS funds more aggressively and exhibit a convex flow–performance relation among these funds.

Measuring the Impact of Unconventional Monetary Policies on the U.S. Banking and Bond Markets at the Lower Bound

Measuring the Impact of Unconventional Monetary Policies on the U.S. Banking and Bond Markets at the Lower Bound

The Parabolic Relationship of Tax Avoidance and Cost of Public Debt

We find that, contrary to prior findings, tax avoidance has a non-linear relationship with cost of debt. Debtholders reward increasing tax avoidance with decreasing bond yields for “undersheltering” firms until reaching a minimum yield. Beyond that minimum yield, as tax avoidance increases, debtholders penalize firms with increasing costs of debt. We use secondary bond market as our empirical setting as the yields are not affected by market timing at issuance. We test several models to conclude that a quadratic function best captures the relation between tax avoidance and cost of debt. Our findings are robust to various specifications of the effective tax rate measure, to the exclusion of large firms, and in both investment grade and speculative grade subsamples.

Stranded Asset Risk in the Bond Market

Asset stranding involves permanently shutting down productive but harmful facilities that impose negative externalities on society. Because bonds are a major source of funding for corporations, investors such as pension funds and insurance companies seeking to reduce their exposure to asset stranding have the potential to limit the supply of capital to polluting firms by divesting their holdings of the polluting firms’ bonds. We examine the implications of stranded asset risk for polluting firms regulated under the Clean Air Act (CAA). Polluting facilities located in counties in violation of the CAA are required to comply with the act’s provisions regardless of cost, leading to a contraction in capital for companies with facilities located in affected counties. More broadly, this study contributes to our understanding of whether and how pollution externalities affect private-sector capital supply to polluting firms.

Emerging Stock Market Integration and Corporate Bond Credit Spreads

ABSTRACT Stock market integration into the world financial markets has been a common and important practice in emerging countries over the past several decades. Relying on the staggered inclusion of China A-shares into MSCI indexes, we employ a difference-in-differences analysis and find that bond credit spreads of firms significantly decrease after the firms’ stock securities are included in the MSCI indexes. We also find that stock market integration reduces credit spreads by improving the stock liquidity, firm reputation, and alleviating information asymmetry. The effect is more pronounced among firms with greater financial constraints or higher performance volatility. Overall, our study provides evidence that emerging stock market integration can generate bond market benefits for firms.

How Does Green Bond Issuance Facilitate the Spillover Effect of Green Technology Innovation in Industry? Evidence from China

As the concept of balancing environmental protection and maintaining sustainable economic development has been widely recognized, the green bond is assuming an increasingly significant role within China’s financial market. We utilize the data from China’s A-share listed enterprises that issued bonds in the period 2010 to 2021 and try to examine whether and how green bond issuance facilitates the spillover effect of green technology innovation in industry. The results show that: (1) Green bond issuance can generate a spillover effect, greatly enhancing green technology innovation within the industry. (2) The spillover effect of green technology innovation from green bond issuance within an industry is more pronounced for state-owned enterprises, and relatively weaker for enterprises in Northeast China in the same industry. Relative to non-high-pollution industries, high-pollution industries reinforce the spillover effect. (3) Financing cost and agency cost are important influencing mechanisms for green bond issuance to improve peer enterprises’ level of green technology innovation. Overall, the results provide theoretical support for encouraging the market for green bonds to maintain their development over the long term and for effectively promoting the transformation of the economy and society to a green and low carbon one.

Problems and Solutions in the Bond Market of UK

The global economy after the COVID-19 pandemic, continues to face challenges by widespread inflation. In response, central banks globally, including the Bank of England, have started cycles of interest rate raise to control inflationary pressures, directly affecting the bond market by increasing bond interest rates. Under the latest market situation, it is necessary to analysis the potential problems in bond market, to further understand its impacts on economic development and monetary policies. The UK bond market is sensitive to monetary policy, particularly during periods of economic distress. For example, when the Bank of England introduced a sudden reversal in policy from quantitative tightening to urgent bond repurchasing program in September 2022, the bond market has volatile response to changes in fiscal and monetary strategies. There is market segmentation in the UK bond market significantly impacts liquidity, particularly during periods of market stress or financial crises. This segmentation effect caused by investor preferences and maturity structures, results in liquidity differences that increasing funding costs. UK government have large burden of bond interest payments, which are mainly driven by high inflation rates and the bond structure with large proportion of inflation-indexed bonds. To mitigate these problems, it is recommended that the UK government implement transparency policy changes, with clearly identify these problems, adopting the recommend approaches to deal with problems from various aspects.

The Impact of Federal Reserve’s Monetary Policy on the Stock, Foreign Exchange and Bond Markets in UK

The Impact of Federal Reserve’s Monetary Policy on the Stock, Foreign Exchange and Bond Markets in UK

The impact of real estate market risks on the issuance costs of urban investment bonds: Evidence from China

It has been widely believed that bond spreads are positively correlated with related market risks. However, some studies in China's urban investment bond (UIB) market indicate that an increase in real estate market risks usually narrows UIB spreads. This article focused on such puzzle and introduced a quadratic form regression to detect a U-shaped relationship between housing price volatility and UIB spreads, which confirms that UIB pricing is actually in consistence with the traditional bond theory. We further indicated that spreads of guaranteed UIBs were barely affected by housing price volatility, and fiscal transparency seemed to mitigate such volatility's impact on the issuance costs of UIBs. Those findings not only illuminate ways of mitigating risks in the UIB market in China using market instruments but also have important implications for how local governments around the world can mitigate their debt-related problems.

In the shadow of country risk: asset pricing model of emerging market corporate bonds

We examine the covariances of corporate bonds in emerging markets (EM) and present an asset pricing framework using instrumented principal component analysis (IPCA) that includes characteristics at the sovereign and bond levels. Our results indicate that EM bond returns are significantly influenced by country-specific risks. Incorporating these characteristics can improve both the total and cross-sectional model fit. We demonstrate that a factor framework tailored to the nuances of the EM universe generates a significant alpha of 2% per annum against the market and a higher information ratio than alternative asset pricing models, such as a conditional beta model designed for developed market (DM) bonds.

The market timing ability of bond mutual funds

We apply the nonparametric methodology of Jiang (Journal of Empirical Finance 10:399–425, 2003) to examine whether bond mutual funds can time the bond market by adjusting their portfolios' market exposure based on anticipated market movement. This approach offers several advantages over the widely used regression-based tests such as Treynor and Mazuy (Harvard Business Review 44(4):131–136, 1966) and Henriksson and Merton (The Journal of Business 54(4):513–533, 1981). In a comprehensive study covering the USA, UK, and China, we find some evidence of positive market timing of bond funds at the individual fund level. On average, bond funds show neutral to slightly negative market timing abilities. After controlling for public information, we find that a smaller number of bond funds successfully time the market based on private timing signals. In terms of categories, we find strong evidence of positive market timing for Government bond funds as a group, consistent with the findings of Huang and Wang (Management Science 60:2091–2109, 2014).

Green finance as a tool to stimulate investments in environmentally sustainable projects

This article discusses one of the most effective methods of financing investments in fixed assets through loans or bonds. The mechanism of green financing is a tool that can attract part of the necessary investments to achieve ambitious goals of the designated strategy. The ESG (environmental, social, governance) agenda has recently become one of the most popular and widely discussed topics in global communities, including financial ones, as any transformation and change in business and economic conjunctures often require a significant amount of investment. The largest number of questions is raised by the E (environmental) component which is responsible for ecology, namely for ensuring decarbonisation of economic and social processes as well as for adapting to the challenges associated with the global energy transition, for protecting and multiplying natural capital, and reducing the harmful human impact on the environment. The article also provides a methodology for calculating the greenium that investors are willing to pay the issuer. The main attention is paid to a detailed analysis of the current state of the green bond market and to the process of forming a greenium in the Russian green finance market which will help investors make informed decisions when choosing investments.

Analyzing the factors influencing the green bond market's development

Analyzing the factors influencing the green bond market's development

Welfare costs of suboptimal retiree decisions.

We make a novel investigation of welfare costs associated with various suboptimal decisions made by retirees, both analytically and numerically. We utilize a unique framework that incorporates recursive utility with housing, and also encompasses expected utility and recursive utility without housing as special cases. Our findings indicate that under-investment in stocks incurs lower welfare costs compared to an equivalent over-investment. Suboptimal allocations in bond holdings result in higher costs than similar misallocations in stocks. Choosing not to participate in the stock market is less detrimental than avoiding the bond market. Should retirees opt to simplify their decision-making by investing solely in one type of asset, it is less costly for them to invest exclusively in bonds. Overconsumption of housing is less costly than an equivalent underconsumption. Suboptimal consumption imposes the highest welfare cost. Decisions regarding consumption, housing, and savings are found to be more crucial than the choice of how to distribute liquid savings between stocks and bonds. Additionally, recursive utility model better captures retirees' preference for bonds over stocks than expected utility model. Our results, which are consistent across various parameter settings, provide valuable insights for academics and policymakers aiming to enhance retiree welfare.