Bond Investors Research Articles

Market-based Financing Through Municipal Bond in India: Investor’s Checklist Using Structural Equation Modeling (SEM)

This paper aims to analyze the investor’s perspective toward municipal bonds and to inspect the success potential of municipal bonds in India from 2010 to 2020. The research’s conceptual model is drawn using PLS-SEM for the factors impacting investor decisions toward investment in bonds issued by urban local bodies in India. Results show that “credit rating,” “yields,” “tax benefit,” and “financial soundness” significantly affect the choice of investment in municipal bonds by retail investors. However, “transparency,” “liquidity,” and “investor awareness” are not found to be significant. Bond issuers can use the model to recognize the factors impacting investors’ prioritization for investments in municipal bonds, which can also help them target a bigger investor base. The study relies on subjective data provided by retail investors and may not be the clear-cut performance indicators. The limitation of the time frame for the study over 10 years will restrict the results specifically for that period. The importance of retail investors in developing countries’ municipal bond markets has been overlooked. The study’s key contribution will be to assist and empower new retail investors to have confidence in participating in this fixed-income financial instrument.

The Eligibility of Green Bonds as Safe Haven Assets: A Systematic Review

This study follows Preferred Reporting Items for Systematic Reviews and Meta-Analyses (PRISMA) to examine the existing literature on the connectedness of green bonds with other markets as an attempt to highlight the effectiveness of green bonds in risk management and the benefits associated with incorporating green bonds in investment portfolios. An extensive search of relevant research papers to the scope of the review led to the identification of 31 articles published by February 2022. Our analysis traces the evolution of studies on green bonds’ interactions with other markets, the methodologies and data frequencies used for cross-market relations analysis, and the role of green bonds in portfolio risk management (diversifier, hedge, and safe-haven) in normal and extreme market conditions. The study reports several interesting findings. First, green bonds can be a strategic safe-haven avenue for investors in stocks, dirty energy stocks, and the foreign exchange market in the US and China in extreme market downturns. Second, green bonds demonstrated hedging properties against spillovers from Bitcoin, forex, soft commodities, and CO2 emission allowance. Third, the role of green bonds in the markets of natural gas, industrial metals, and crude oil is limited to a portfolio diversifier in different investment horizons. Fourth, green bonds had no diversification or hedge benefits for investors in conventional bonds. Fifth, the interrelationships between green bonds and most markets’ understudy were influenced by macroeconomic and global factors such as the COVID-19 pandemic, economic policy uncertainty, OVX, and VIX. Our review of the literature also facilitated identification of future research topics. The outcome of the review offers insightful information to investors in green bonds in risk management and assets allocation. Policy makers can benefit from this review in effective policy legislation for the advancement of the green bonds market and acceleration of a smooth transition to a net zero emission economy.

Safe-haven properties of green bonds for industrial sectors (GICS) in the United States: Evidence from Covid-19 pandemic and Global Financial Crisis

The Covid-19 pandemic unfolds the vulnerability of financial markets at the time of rare disasters. To hedge the mean-dependent risk, investors rely upon traditional assets such as gold; however, the tail-dependent risk, especially during market turbulence, considerably dampened the hedging effectiveness. On the contrary, green bonds emphasize sustainable investment in the long term and have become an inevitable tool to hedge against financial risks, and climate risks, and rare disasters. Thus, this study explores the hedging and safe haven aspects of the bullish market of green bonds against bearish markets of industry sectors across the United States (U.S.) over the period of 1st January 2008 to 7th May 2021, including the Global Financial Crisis and the Covid-19 pandemic. The findings of cross-quantilogram analysis disclose that green bonds reap diversification benefits during overall market conditions as well as market turmoil, hence confirm the safe-haven behavior of green bonds. Furthermore, our results disclose that the potential role of investment in green bonds can reboot the economy without affecting low-carbon transition targets.

Credit risk pricing in a consumption‐based equilibrium framework with incomplete accounting information

AbstractWe present a consumption‐based equilibrium framework for credit risk pricing based on the Epstein–Zin (EZ) preferences where the default time is modeled as the first hitting time of a default boundary and bond investors have imperfect/partial information about the firm value. The imperfect information is generated by the underlying observed state variables and a noisy observation process of the firm value. In addition, the consumption, the volatility, and the firm value process are modeled to follow affine diffusion processes. Using the EZ equilibrium solution as the pricing kernel, we provide an equivalent pricing measure to compute the prices of financial derivatives as discounted values of the future payoffs given the incomplete information. The price of a zero‐coupon bond is represented in terms of the solutions of a stochastic partial differential equation (SPDE) and a deterministic PDE; the self‐contained proofs are provided for both this representation and the well‐posedness of the involved SPDE. Furthermore, this SPDE is numerically solved, which yields some insights into the relationship between the structure of the yield spreads and the model parameters.

What went wrong? The Puerto Rican debt crisis, the “Treasury Put,” and the failure of market discipline

What went wrong? Why did seemingly rational, forward-looking bond investors continue to purchase Puerto Rican debt with only a modest risk premium? Why did financial markets fail to exercise market discipline and restrict capital flows to Puerto Rico?This paper examines the hypothesis that investors believed Puerto Rican debt was implicitly insured by the U.S. government by studying a rare situation where this “Treasury Put” was extinguished. The expectation of a federal bailout was perfectly reasonable given past behavior by the federal government. Evaluating the Treasury Put hypothesis with a minimal set of assumptions is possible given three unique features of the economic environment. The key feature is an exogenous “seismic shock” – the non-bailout of the city of Detroit in 2013 that effectively extinguished the Treasury Put, estimated in this paper as 350 basis points. Institutional reforms that would eliminate the Treasury Put are considered, but none are found satisfactory. How to extinguish the Treasury Put on an ongoing basis in a democratic society remains an open question.

A Market Analysis of Potential Investment in Green Bonds and it’s Contribution to Sustainable Development

Since 1880, there has been an average annual increase in the ambient temperature of about 0.8° Celsius, which is what causes global warming. As a result of continued climate change, ocean water has become more acidic, and rising carbon levels have encouraged the development of green bonds. These bonds designed to benefit the environment. As people's understanding of sustainable development has expanded. The amount of money received through the selling of Programs that support the use of renewable energy sources, the growth of agriculture, fisheries, and poultry, as well as clean transportation, afforestation, the preservation of biodiversity, moderate fossil fuel consumption, and the slowed rate of global warming are funded with the help of green bonds. Studies show that some investors look for green bonds that give a fixed income as well as environmental protection and decision-making that takes into account positive societal effects or environmental benefits. The economy must embrace and promote the growing trend of green bonds. The principal of green bonds is paid out regularly to investors, and interest is paid when the bond matures. Bonds issued by corporations’ bear dividends. The World Bank's support for green bonds, the impact Indian green bonds have on Indian investors, and other topics are covered in this essay. An analysis of SBI's 2019 "green bonds" is provided in this essay. This essay makes an effort to give a comprehensive overview of the benefits and potential of green investments in order to assist sustainable development. There is a brief list of projects that were started using green bonds. This study includes a number of illustrations to support the global and Indian green bond issues. The issuance volumes for 2021, 2020, and 2019 are shown on this page. It has been suggested how the money raised by green bonds in 2021, 2020, and 2019 will be used for various purposes

Retail bond investors and credit ratings

Using comprehensive data on U.S. corporate bond trades since 2002, we find evidence that retail bond investors overrely on untimely credit ratings to their financial detriment. Specifically, they appear to select bonds by first screening on a credit rating and then sorting by yield, buying the highest-yielding bonds within each rating level. Because yields lead credit rating changes, selecting on yield-within-rating means that retail investors systematically trade in the opposite direction of changing fundamentals, buy in advance of credit downgrades and defaults, and materially underperform a diversified portfolio. Our study provides new evidence of ill-informed retail trading in a market that is thought to be relatively sophisticated, corroborates regulators’ concerns about investor overreliance on credit ratings, and contributes to the academic literature on the roles and consequences of credit ratings in debt markets.

Investigating Factors Affecting Institutional Investors’ Green Bond Investments: Cases for Beijing and Shenzhen

We conducted a survey of institutional investors in Beijing and Shenzhen to analyze the factors affecting green bond (GB) investing in China, such as credit rating, GB issuer, fund use, liquidity, redemption term, certification label, and type of currency. We then compared the results for Beijing and Shenzhen, including factors that affected greenium and the two cities’ willingness to pay (WTP). Using a double-bounded dichotomous choice contingent valuation method, we find that higher credit ratings tend to increase Beijing investors’ WTP and that the use of GB proceeds affects Shenzhen investors’ WTP. We also find that investors place importance on the type of currency, length of redemption term, and liquidity when investing in GB, while the certification label does not have an impact on WTP. The WTP for GB was higher among Shenzhen investors than among Beijing investors. These findings provide important insights for the government and financial institutions to take the right action to expand the GB market and to establish a GB framework that induces the financial sector toward reducing greenhouse gas emissions.

What factors affect corporate bond financing costs? -- Taking the corporate bonds of Shanghai and Shenzhen Stock Exchanges of China as an example

This paper focuses on the factors which influence the corporate bond financing cost. Based on the complexity and diversity of influencing factors of corporate bond financing costs, this paper discusses them from macro and micro dimensions. This paper discovers that PMI, a macroeconomic indicator, influences bond financing costs positively; the higher the PMI, the more prosperous the economy is, and the more expensive bond financing is. Other macroeconomic variables have varying effects on the financing costs of corporate bonds with various ratings and maturities. Among the individual bond characteristic variables at the micro level, the bond maturity, the issuer's asset liability ratio, and whether the bonds are guaranteed have a positive impact on the bond financing cost, while the bond issuance amount, the issuer's return on equity, and the issuer's corporate nature negatively affect the cost of bond financing. Therefore, the suggestions are: Firstly, for the governments, when PMI increases, it is necessary to introduce corresponding policies to reduce the financing costs of enterprises; Secondly, for the issuer, it should improve its ROE and reduce the asset liability ratio, select the appropriate bond covenants, and consider the macroeconomic situation to choose the appropriate time to issue bonds to reduce financing costs; Thirdly, for bond investors, they should pay attention to macroeconomic fluctuations, study bond covenants and financial indicators.

The Credit Suisse CoCo wipeout: Facts, misperceptions, and lessons for financial regulation

The Credit Suisse CoCo wipeout: Facts, misperceptions, and lessons for financial regulation

DEA를 이용한 전환사채 투자 적정성 분석 : 문화콘텐츠 관련 기업을 중심으로

최근 금리가 상승하면서 채권에 대한 차환 발행 위험이 초래되고 있다. 특히 중견 이하의 기업에서 자금 조달 목적으로 발행하는 메자닌 상품의 경우에는 문화콘텐츠 산업 관련 기업의 발행 규모가 매년 증가하고 있다. 우리나라의 경우에는 문화콘텐츠 산업 부문이 세계 시장에서 큰 관심을 받고 있고 해당 산업에 대한 유동성 공급이 적절하게 이뤄져야 한다. 따라서 본 연구에서는 자료포락분석을 이용해 메자닌 상품의 효율성 점수를 산출하고 이에 대한 상환 성과를 분석한다. 이를 위해 메자닌 상품에 맞게 회계 자료를 토대로 재무건전성, 발행 건전성 그리고 변수 건전성으로 나눠 투입 요소를 정의하고 매출액과 당기순이익 그리고 영업이익을 산출 요소로 정의한다. 2018년도부터 2021년까지 발행한 약 350개의 전환사채를 대상으로 실험을 한 결과, 효율성 점수가 약 6~7점 이상인 그룹에서 패리티가 약 1.7을 보였는데 이는 효율성 점수가 높을수록 상환 성능에서 우수하다는 것을 입증했다. 본 논문은 경영과학 분야에서 사용하는 자료포락분석을 기업이 아닌 금융 상품에 적용했다는 것과 금융 상품에 맞게 투입 요소를 정의한 것에서 의의가 있다고 판단된다.

Doing well while doing good: ESG ratings and corporate bond returns

ABSTRACT The relationship between ESG performance and equity returns has become a popular area of research, but the same is not yet the case for bond returns. In this paper, we explore whether incorporating ESG factors, beyond emissions into the bond portfolio investment process leads to under or out performance. We find that ESG investing in bond portfolios does not lead to over or under performance. In other words, you do not have to ‘pay to do good’. Further, in the period since the Paris agreement, Energy sector bond portfolio returns are positively related to ESG factors. This finding aligns with the theoretical prediction of Pedersen, Fitzgibbons, and Pomorski (2020), namely, that the ESG-return relationship should become positive as investors become more aware of ESG risks and opportunities. Overall, we show that Bond investors can ‘do well while doing good’.

PENGARUH KONVEKSITAS TERHADAP SENSITIVITAS HARGA JUAL DAN DELTA-NORMAL VALUE AT RISK (VAR) PORTOFOLIO OBLIGASI PEMERINTAH MENGGUNAKAN DURASI EKSPONENSIAL

Bonds are one of the investment instruments issued by the issuer as proof of debt. Bond investment is relatively safe, but it is possible for investors to experience losses. Investors should always consider that trading a bond is always risky. One of the important bond risks is interest risk. The concept of duration can only explain well for small changes in interest rates but cannot explain well for large changes in interest rates. The estimation of the duration concept will have a larger calculation error with the greater changes in market interest rates that occur so it is necessary to add convexity to improve accuracy. This study aims to estimate the risk of government bonds based on the estimation of bond prices with the effect of convexity. Several studies have shown that exponential duration can predict bond prices more accurately than Macau duration. Exponential duration with convexity will be applied in this study to measure the accurate value of bond prices caused by changes in interest rates. The Delta-Normal VaR portfolio method is used to calculate risk based on estimated bond prices in the form of a portfolio. The formation of this portfolio aims to reduce the losses suffered by investors. This method is applied to four Indonesian government bonds with codes FR0056, FR0059, FR0074, and FR0080. The results showed that the bonds portfolio FR0056 and FR0074 had the smallest risk compared to other portfolios with a weight proportion of 15% for bonds FR0056 and 85% for bonds FR0074.

Fickle emerging market flows, stable euros, and the dollar risk factor

Policymakers fear the destabilizing impact of fickle global investors on emerging markets. Euro area investors are significant participants in emerging bond markets and exhibit volatile flows, but their fickleness does not result in indiscriminate periods of surge and flight. Employing granular data, we discern important investor differentiation by currency denomination and issuer-level risk factors. First, euro area investors exhibit a home currency bias leading to both strong cross-sectional preference and more stable flows to EUR-denominated bonds over time. Second, volatile flows to USD and local-currency-denominated bonds are robustly related to global risk factors including the broad dollar. Investors differentiate among USD-denominated bonds such that flows to currency mismatched (and less creditworthy) sovereigns and corporates are more sensitive to the broad dollar. In contrast, local currency bond investors appear primarily concerned with currency rather than issuer-specific credit risk.

How does corporate ESG performance affect bond credit spreads: Empirical evidence from China

In recent years, as the concept of sustainable development has grown in popularity, ESG has attracted widespread interest from people of all backgrounds. This paper empirically investigates the impact of corporate ESG performance on bond credit spreads using a sample of 988 bonds issued by 443 A-share listed companies from the first quarter of 2009 to the fourth quarter of 2020. Results indicate that bond credit spreads are lower for listed companies with higher ESG performance. Good ESG performance decreases bond credit spreads by decreasing corporate financial risk, enhancing corporate transparency, and decreasing debt agency costs. The effect of ESG performance on bond credit spreads is more pronounced for non-state enterprises, enterprises in poor macroeconomic environments, and enterprises in regions with a higher degree of marketization. This study provides evidence for the positive economic consequences of ESG performance from the perspective of bond financing, with implications for firms to improve ESG performance and bond investors to optimize investment decisions.

Do Bond Investors Know Better than the Credit Rating Agencies?

This study examines the ability of bond investors to detect and adjust for potentially biased credit ratings. It finds evidence that investors require higher yield spreads on bonds with upwardly biased ratings, and that unusual yield spreads have predictive power for rating changes and defaults within 3 years of bond issuance. Bonds with unusually high yield spreads are more (less) likely to be downgraded (upgraded). Furthermore, 3-year default rates for those bonds are 2.5 times those of bonds with unusually low yield spreads. These findings suggest that yield spread could be a better measure of credit risk than ratings.

A Changing Stock–Bond Correlation: Drivers and Implications

The relationship between stock and bond returns is a fundamental determinant of risk in traditional portfolios. For the first two decades of the 21st century, the stock–bond correlation was consistently negative and investors were largely able to rely on their bond investments for protection when equities sold off. But this was not the case in the previous century, and macroeconomic changes—such as higher inflation uncertainty—could lead to a reappearance of the positive stock–bond correlation of the 1970s, 80s, and 90s. This would have broad implications for investors, either increasing portfolio risk or forcing allocation changes likely to reduce expected returns. This article analyzes the implications for investors of a change in this “golden parameter” and presents a simple macroeconomic model to help understand its drivers, supported by international empirical evidence. Finally, it explores the role of alternatives in making up the potential diversification deficit in a positive stock–bond correlation world.

How reactive is investment in US green bonds and ESG-eligible stocks in times of crisis? Exploring the COVID-19 crisis

This study examines how green bonds and environmental, social and governance (ESG) stock market returns have reacted to the COVID-19 crisis in the US. Unlike the Standard and Poor's (S&P) 500 index, the response of green bonds and ESG markets to pandemic progress is nonlinear: A low (large) level of confirmed new cases of COVID-19 has a positive (negative) impact. Furthermore, the implemented containment policies (stringency measures and vaccination campaigns) are positively valued, but their simultaneous use is perceived by investors as a bad signal. Overall, our findings question the resilience of investments in green bonds and ESG markets.

Do ESG scores have incremental information value on the primary bond market?——evidence from China

ESG scores are essential information tools in the capital market, but prior study has not fully discussed the effect and internal mechanism of ESG scores on bond investors’ risk pricing in the primary market. The purpose of this study is to investigate the relationship between the ESG scores and risk premium of bond issuance based on the sample of Chinese listed corporations. We find that when ESG scores of the bond issuer are higher, the investors will require a lower risk premium. The result indicates that ESG scores already have positive information effect in Chinese primary bond market. Furthermore, we make mechanism and heterogeneity tests to prove that ESG scores can provide investors with incremental information, which is helpful for bond investors to identify risks and price effectively. Our study in the context of the emerging economy of China examines the incremental information value of ESG scores for bond investors, and provides evidence for the application of sustainable development concepts in global capital markets.

Delegated Bank Monitoring by Bond Investors: Evidence from Japanese Main Banks

Delegated Bank Monitoring by Bond Investors: Evidence from Japanese Main Banks