Longer Maturities Research Articles

Riding the Yield Curve

Investors seek to hedge against interest rate risk by taking long or short positions on bonds of different maturities. We study changes in risk taking behavior in a low interest rate environment by estimating a market stochastic discount factor that is non-linear and therefore consistent with the empirical properties of cashflow valuations identified in the literature. We provide evidence that non-linearities arise from hedging strategies of investors exposed to interest rate risk. Capital losses are amplified when interest rates increase and risk averse investors have taken positions on instruments with longer maturity, expecting instead interest rates to revert back to their historical average.

Gold, platinum and the predictability of bond risk premia

We show that the ratio of gold to platinum prices (GP) contains significant predictive information for excess U.S. government bond returns, even after controlling for a large number of financial and macro factors. Including GP in the model improves the predictive accuracy, over and above the standard macroeconomic and financial predictors, at all forecasting horizons for the shortest maturity bonds and at longer forecasting horizons for bonds with longer maturities beyond 2 years. The findings highlight the predictive information captured by commodity prices on bond market excess returns with significant investment and policy making implications.

Oil price uncertainty and movements in the US government bond risk premia

In this paper, we analyze the predictability of the movements of bond premia of US Treasury due to oil price uncertainty over the monthly period 1953:06 to 2016:12. For our purpose, we use a higher order nonparametric causality-in-quantiles framework, which in turn, allows us to test for predictability over the entire conditional distribution of not only bond returns, but also its volatility, by controlling for misspecification due to uncaptured nonlinearity and structural breaks, which we show to exist in our data. We find that oil uncertainty not only predicts (increases) US bond returns, but also its volatility, with the effect on the latter being stronger. In addition, oil uncertainty tends to have a stronger impact on the shortest and longest maturities (2- and 5-year), and relatively weaker impact on bonds with medium-term (3- and 4-year) maturities. Our results are robust to alternative measures of oil market uncertainty and bond market volatility.

Performance Evaluation and Adaptation of Food Barley (<i>Hordeum Vulgare</i> L.) Varieties in the Highlands of North Gondar Ethiopia

In Ethiopia, barley is also one of the oldest cultivated crops and currently it is the fifth most important cereal crop next to maize, tef, sorghum, and wheat and the study was conducted at Debark, Dabat and Wogera in 2014/15 main season with the objectives of identify high yielder food barley varieties using seven improved food barley varieties including local check in Randomized Complete Block Design with three replications. At Debark, the analysis of variance revealed highly significant difference (p≤0.01) among treatment means for days to heading, plant height and thousand seed weight. Significant difference at (p≤0.05) also observed among treatments for Maturity days, spike length, biomass and grain yield. The mean grain yield ranged from 3403kg/ha-5143kg/ha. Highest mean grain yield was recorded from variety HB-1307 (5143kg/ha), EH1493 (4636kg/ha) CROSS41/98 (4184kg/ha) and lowest mean grain yield was recorded from variety AGEGNEHU (3403kg/ha). At Dabat, the analysis of variance showed that significant difference (p≤0.05) for days to maturity, seeds per spike and thousand seed weight. The rest parameters exhibited non-significant difference among varieties. At Wogera, the analysis of variance showed highly significant difference at (p≤0.01) among tested varieties for days to maturity, spike length, seeds per spike, thousand seed weight and grain yield. Longest maturity days were recorded from variety CROSS-41/98 (124 days), while shortest maturity days were recorded from variety AGEGNEHU (112 days). The mean grain yield ranged from 2015kg/ha-5008kg/ha. At Wogera highest mean grain yield was recorded from variety HB-1307 (5008kg/ha) followed by CROSS41/98 (4416kg/ha). Over locations combined analysis of variances showed highly significant difference at (p≤0.01) among varieties for all yield and yield components except days to heading. The interaction of location by variety indicated that significant effect on biomass and grain yield. The rest yield components not affected by the interaction of genotype by location. Over location grain yield results ranged from 3641-4680 kg/ha. Lowest and highest grain yield were recorded on Local check (3641kg/ha) and HB-1307 (4680kg/ha), respectively. Therefore, HB-1307 and CROSS 41/98 recommended for seed production at highland areas of north Gondar and similar agro ecologies.

Riding the Yield Curve: Risk Taking Behavior in a Low Interest Rate Environment

Investors seek to hedge against interest rate risk by taking long or short positions on bonds ofdifferent maturities. We study changes in risk taking behavior in a low interest rateenvironment by estimating a market stochastic discount factor that is non-linear and thereforeconsistent with the empirical properties of cashflow valuations identified in the literature. Weprovide evidence that non-linearities arise from hedging strategies of investors exposed tointerest rate risk. Capital losses are amplified when interest rates increase and risk averseinvestors have taken positions on instruments with longer maturity, expecting instead interestrates to revert back to their historical average.

Modelling EA banks default rates with jointly spanned and unspanned interest rates and unspanned BEI rates

The paper quantifies the influence of interest rates and inflation rates on default rates of banks. By expanding the work of Duffee (1998), with the unspanned risks as in the work of Joslin, Priebsch, and Singleton (2014), we estimate a multifactor model with unspanned interest rates and inflation rates to test the performance of unspanned variables in the default rate term structure of banks. The model is trained in samples of positive interest rates and evaluated in samples of negative interest rates. we check the robustness of the model by comparing the results with the performance of alternative model specifications. The model reveals that unspanned variables have worse performance than alternative models specifications. The negative effect of interest rates on default rates over longer maturities may lead the EA banks to decrease the loan supply to the real economy. As a consequence EA banks will have a lower net interest margin as the return of assets is lower. This may increase the future probability of default. Thus, the solution for EA banks is on the reach to yield behavior as described by Bruno and Shin (2015). This means that EA banks have to modify the allocation of assets more in favour of riskier and longer maturity securities to obtain higher profitability.

Relationship between debt maturity and IPO: the case of Indonesian firms

Initial public offering (IPO) is a big step in company life cycle as the time when company evolves from private to public firm by adding another source of financing. Studying the impact of IPO to debt maturity structure choices in Indonesia is important because debt maturity has an important role in emerging markets' macroeconomic condition. Based on literature review, it is expected for companies to take debt with longer maturity post-IPO for the benefits and accessibility. Company sample is taken from Indonesia Stock Exchange, using data of companies that have undergone IPO from 2008-2011. After analysis, it is found that one and two years after IPO, newly listed firms increase the use of long-term debt. Other statistically significant variables are firm's asset maturity, leverage, and growth opportunity. Result of this research would be an addition to Indonesia's financial literature and give insight of IPO's implication to Indonesian firms.

The impact of financial flexibility on debt maturity structure for Australian and Malaysian firms

Financial flexibility enables firms to respond positively to unanticipated shocks or investment opportunities. Financial flexibility and the debt maturity structure are important for a firm's survivability. During a crisis, highly leveraged firms cannot survive due to the inability to pay back and roll over their debt for longer maturity. Financial flexibility could contribute better capital structure decisions and reduce risk. This paper investigates financial flexibility and the impact on the debt maturity structure in Malaysian and Australian firms. The results suggested that Malaysian firms follow a pecking order theory, whereas Australian firms follow the trade-off theory. Financial flexibility firms are generally less leveraged. These firms were found to have less long-term debt in both countries. They prefer short-term debt since they are able to access financing resources at lower cost. Non-financial flexibility firms prefer long-term debt because of the reduced capability of repayment and the high rollover risk if they hold short-term debt.

Regulação ineficaz para forçar alongamento: O caso da Previdência Complementar Aberta no Brasil

Apesar da queda da taxa de juros observada no Brasil nas últimas décadas, combinada com regulações especificas sobre a Previdência Complementar Aberta que incentivam a tomada de risco de longo prazo, as instituições desse segmento aparentam ser consideravelmente sensíveis a fatores de curto prazo, ao mesmo tempo que evitam exposição a fatores de risco de prazos longos. Com dados de alocação de portfólio de grandes entidades, implementamos um modelo VAR para avaliar o impacto da taxa de juros sobre decisões de gestão de carteira e realizamos uma análise contrafactual a fim de definir o efeito causal da regulação sobre a tomada adicional de risco. Os resultados indicam que aumentos na taxa de juros geram reduções significantes e persistentes de investimentos em ativos mais arriscados e de maior maturidade, ao passo que a regulação implementada não foi capaz de forçar a maior tomada de risco por parte das instituições, além de gerar distorções em segmentos do mercado financeiro brasileiro.

Scale Economies in the Money Market

Money-market issuers reward scale when they borrow from prime money funds. The scale they reward isn’t the scale of the transaction or of the fund, but rather the scale of the fund complex. For a one-month loan the magnitude is a basis point per fourfold increase in complex size. Larger complexes also enjoy an advantage when exiting holdings: they are both more likely to part with a holding and more likely to exchange it with the issuer for new paper with longer maturity. Our results demonstrate both economies of scale, which can concentrate the industry, and also the importance of relationships in money-market transactions.

Labor unions and loan contracts

ABSTRACTThis paper investigates the relation between labor unions and loan contracting. We find that firms in more unionized industries tend to have lower loan spreads, longer maturity, a lower likelihood of security requirement, fewer and less strict loan covenants, and fewer performance- based covenants. Additionally, using firm-level union election data, we do not find lower loan spreads or longer maturity in unionized firms, but we show that bank loans to unionized firms are less likely to require security, have fewer and less strict loan covenants, and fewer performance-based covenants. While the results on loan spreads are mixed, we find consistent evidence that unionization has significant effect on loan covenants with industry and firm level unionization data as well as the instrument variable analysis. Labor unions’ risk preference is similar to that of creditors. Therefore, it helps align the interests between banks and labor unions, thus reducing the cost of bank loans in terms of loan covenants.

Monetary Policy Uncertainty and the Response of the Yield Curve to Policy Shocks

AbstractThis paper studies the nonlinear response of the term structure of interest rates to monetary policy shocks and presents a new stylized fact. We show that uncertainty about monetary policy changes the way the term structure responds to monetary policy. A policy tightening leads to a significantly smaller increase in long‐term bond yields if policy uncertainty is high at the time of the shock. We also look at the decomposition of bond yields into expectations about future policy and the term premium. The weaker response of yields is driven by the fall in term premia, which fall more strongly if uncertainty about policy is high. Conditional on a monetary policy shock, higher uncertainty about monetary policy tends to make securities with longer maturities relatively more attractive to investors. As a consequence, investors demand even lower term premia. These findings are robust to the measurement of monetary policy uncertainty, the definition of the monetary policy shock, and to changing the model specification.

Corporate Social Responsibility (CSR) Disclosure and the Choice between Bank Debt and Public Debt

SYNOPSIS This study examines whether and how corporate social responsibility (CSR) disclosure plays a role in firms' choices of public versus private debt financing. We find that borrowing firms with higher levels of CSR disclosure tend to rely more on public debt than private debt. Further analyses reveal that the relation between CSR disclosure and firms' reliance on public debt is stronger for borrowing firms with higher financial reporting quality, and with standalone or externally assured CSR reports. In addition, we find that borrowing firms with higher levels of CSR disclosure tend to issue bonds at more favorable terms (i.e., lower bond yield spread and longer maturity). Together, our findings are consistent with the notion that nonfinancial CSR disclosure plays an incrementally important role in a firm's debt placement decisions. JEL Classifications: G32; M14; M21. Data Availability: Data are available from the public sources identified in the paper.

Measuring Bond Investors’ Risk Appetite Using the Interest Rate Term Structure

The distribution of term premia includes additional information beyond that contained in the traditional three-parameter decomposition of the Treasury yield curve. The author finds that the position and the size of the curvature hump are both important. A yield curve hump positioned at longer maturities appears to be consistent with lengthier time horizons of investors and with more risk-seeking behavior. The author finds that this new parameter Granger drives both future US economic activity and bond returns. TOPICS:Fixed income and structured finance, fixed-income portfolio management, statistical methods

Innovando la quesería tradicional mexicana sin perder artesanalidad y genuinidad

Se ha observado que aquellas queserías que alcanzan mayor grado de tecnificación, más producción y mayores ventas entran en un proceso de decisión complicado, pues el incremento en volumen hace que se alejen de las cualidades de artesanalidad y genuinidad y comiencen a parecer más productos derivados de un proceso industrial. Objetivo: identificar innovaciones sociales y tecnológicas que permitan a los queseros artesanales mexicanos ganar mercado, sin perder las cualidades de genuinidad y artesanalidad en sus productos. Metodología: se analizó el sistema de producción de 32 quesos mexicanos genuinos que cumplen las cuatro características de artesanalidad mencionados en la literatura. Los quesos fueron agrupados con relación a las variables tipo de proveeduría, clase de ganado de donde proviene la materia prima e integración organizacional, mediante un análisis de conglomerados de tipo jerárquico. Luego, se identificaron las variables que distinguen a cada grupo, en términos de sus características geográficas, microbiológicas, fisicoquímicas, comerciales y jurídicas, mediante un análisis canónico discriminante. Resultados: de acuerdo con el tipo de proveeduría, ganado de donde proviene la materia prima y la integración organizacional, se identificaron tres grupos de quesos. Las variables que los distinguen fueron: el alcance de mercado, el tipo de pasta, el pH y la macro región. Los resultados reflejan que la integración organizativa y características fisicoquímicas como menor humedad y pH facilitan la comercialización a mercados más lejanos, regionales e internacionales. Limitaciones: la principal limitación de este estudio es que, probablemente, el análisis no incluye muchos quesos mexicanos que son conocidos solo de manera local, pero cumplen con las características de artesanalidad y genuinidad. Conclusiones: existen innovaciones de tipo tecnológico, como mayor tiempo de maduración con medios físicos y biotecnológicos, que podrían ayudar a mejorar la estabilidad del producto, lo cual aumentaría la calidad sanitaria y permitiría transportar estos quesos a mercados más distantes; mientras que por el ámbito de la innovación social, la organización de los elaboradores y comercializadores de los distintos quesos, sería primordial para el surgimiento de signos distintivos y para la creación de espacios de venta directa.

Decomposing the term structures of local currency sovereign bond yields and sovereign credit default swap spreads

In this study, we analyze the relationship between the term structures of local currency-denominated sovereign bond yields and foreign currency-denominated sovereign credit default swap (CDS) spreads for developed countries. We develop a consistent pricing model between the term structures of local currency-denominated sovereign bond yields and foreign currency-denominated sovereign CDS spreads, which allows us to decompose these term structures into credit risk and non-credit risk (e.g., convenience yield or liquidity risk). In the euro area countries, we show that the credit risk components are mainly related to local equity markets or the proxy of the regulatory incentive of the global dealer banks. In the core countries of the euro area, the non-credit risk component of the bond spread is related to the proxy of the flight to liquidity at all maturities, and function as convenience yield. During the sovereign debt crisis in the developed European market, in the peripheral countries of the euro area, the non-credit risk component of the bond spread is related to the liquidity risk. At the short end of the term structure, this relation is stronger than that at longer maturity. On the other hand, the relationships between the non-credit risk components of CDS spreads and risk factors are weak and the fluctuations of the CDS spread is mainly driven by the credit risk components in both country groups.

Do it with a smile: Forecasting volatility with currency options

We show that traditional measures of curvature and symmetry of the “smiles” improve volatility predictions in forex markets. We consider post crisis data at a daily basis for seven currencies vis a vis the American dollar: The British pound, the Euro, the Australian dollar, the Japanese yen, the Brazilian real and the Mexican and Chilean peso. While our results are robust to the option currency and maturity, they are particularly strong for latin-American currencies and options with longer maturity. We find that the simultaneous inclusion of skewness and kurtosis to a forecasting model significantly improves its predictive accuracy.

International spillovers of U.S. financial volatility

We study the international spillover effects of U.S. bond and stock market volatility using a panel data set of seventeen developed countries. We find significant spillover impacts of U.S. financial market volatility on international output growth. Volatility of U.S bonds with longer maturities is shown to have a more significant impact on international output growth than volatility of U.S. bonds with shorter maturities. Regardless of the maturity of the bonds, U.S. financial market volatility is shown to play a larger role statistically in explaining international output growth than a country’s own financial market volatility.

How Much Would You Pay to Resolve Volatility Risk in Agricultural Commodity Markets?

This article investigates the pricing of volatility risk in agricultural commodity markets. We show theoretically that the cost of bearing volatility risk can be measured using returns to delta-neutral straddles. Using a sample of options for five commodities (corn, soybeans, Chicago wheat, live cattle, and lean hogs) for 2002–2016, we provide the following findings. First, returns to delta-neutral straddles are negative, ranging between –0.87% and –0.06% per day, suggesting that investors are willing to pay a cost to avoid volatility risk. Second, volatility risk is priced mainly at short maturities (within 2 months) but is negligible at longer maturities, and this term structure of volatility risk prevails in all markets. Last, volatility risk is more pronounced on the day immediately preceding the U.S. Department of Agriculture (USDA) announcements but is not effectively explained by economic or commodity specific factors.

Debt Renegotiation and the Design of Financial Contracts

This study examines the design of financial contracts after renegotiations. It focuses on the degree of renegotiation as measured by the number of amendments to the contract. I find that the design of renegotiated financial contracts is not homogenous, although the most frequent amendments are to the loan’s amount and maturity. I show that the number of amendments increases with longer maturities. Collateral and bank reputation have the opposite effect. Creditors friendly environments with fewer renegotiation frictions increase the number of amendments. Overall, contractual, organizational, and legal features have a significant influence on the design of financial contracts after renegotiation.