Bond Prices Research Articles

Insider Sales and Corporate Bond Yield Spread: Evidence from China

ABSTRACT We study whether and how insider sales affect a firm’s bond yield spreads. By examining insider sales and corporate bond yield spreads from 2011 to 2022 in the Chinese market, we find robust evidence that insider sales have a significant and important impact on corporate bond yield spreads. A one-standard-deviation increase in insider sales resulted in an increase of 11.82 bps in corporate bond yield spread. Further analysis suggests that while both the information asymmetry channel and the tunneling channel exist, bond investors do not believe that excess return from insider sales would reduce fund occupancy and alleviate default risk. We also find that ownership structure matters for the impact of insider sales on corporate bond yield spreads, where insiders in firms with more concentrated ownership structures tend to tunnel or withhold private information, whereas a more balanced ownership has the opposite effect. There is also weak evidence that the impact of insider sales on corporate bond yield spreads is larger in private firms than in state-owned ones. In addition, institutional investor ownership weakens the role of insider sales in bond pricing and, in particular, weakens the response of bond investors to insider sales in private firms.

Debt dynamics and credit risk

We investigate how the dynamics of corporate debt policy affect the pricing of corporate bonds. We find empirically that debt issuance has a significant stochastic component that is imperfectly correlated with shocks to asset value. As a consequence, the volatility of leverage is significantly higher than asset volatility over short horizons. At long horizons, the relation between leverage and asset volatility is reversed due to mean reversion in leverage. We incorporate these stochastic debt dynamics into structural models of credit risk, both standard diffusion models as well as newer models with stochastic volatility and jumps. Including stochastic debt gives more accurate predictions of credit spreads in both the cross-section and the time series.

On the predictability of bonds

From a global perspective, bonds represent an important source of funding not only for companies but also for governments and multinational entities. Therefore, the analysis of their prices and yields is of long-term interest to academic research. This work deals with the break-even point in the behavior of bond prices, after which they no longer move by random walk based on standard micro and macroeconomic variables but converge linearly to the nominal value. From the investor's point of view, it no longer makes sense to speculate on a significant rise or fall in price after this point, and the bond acquires only a fixed income character. On a sample of 652 bonds listed on the Frankfurt Stock Exchange, we showed that the break-even point is located approximately 400 days before maturity, regardless of the total period of existence of the bond.

The role of adverse outcomes in municipal debt costs

This study investigates whether municipal bond prices reflect adverse outcomes (i.e., material noncompliance with laws and regulations and questioned costs) and the interactive effect of adverse outcomes and internal control weaknesses. Using hand-collected data from 866 official registration statements, our results suggest that adverse outcomes are an important determinant of initial bond yields and help explain the underlying relationship between weaknesses in internal control and initial bond yields. Specifically, the municipal bond market penalizes governments with adverse outcomes, with a greater penalty if an adverse outcome is accompanied by a material weakness in internal control.

A Study on the Effect of Precious Commodity Prices and Macroeconomic Fluctuations on Cryptocurrency Trading in India

The role of currency in the functioning of the global economy is undeniably of utmost importance to people and governments, whose trust in monetary authorities is the sole provider of value to most of the world’s money which is in the form of fiat currencies. An alternative means of value exchange called cryptocurrencies operating entirely through the internet has the potential to dilute public trust in fiat currencies due to many advantages including fiscal decentralization among others. This study examines the relationship between key macroeconomic variables namely bond prices, dollar exchange rates and the price of gold and its derivatives and cryptocurrency trading in the Indian context. The daily frequency data is collected after the Indian Supreme Court’s judgement in March 2020 which overturned a ban on cryptocurrencies which was imposed before it. We aggregated the data using Principal Component Analysis and examined the short-run and long-run relationship between the variables and cryptocurrency trading using Toda Yamamoto Granger Causality Tests and ARDL Error Correction Model. The results reveal valuable insights about public perception of cryptocurrencies either as an investment asset or as a medium of exchange by examining the significance of individual independent variables in both the long and short run.

A Bond Pricing Model with Credit Migration Risk: Different Upgrade and Downgrade Thresholds

A Bond Pricing Model with Credit Migration Risk: Different Upgrade and Downgrade Thresholds

Study of Pricing of High-Dimensional Financial Derivatives Based on Deep Learning

Many problems in the fields of finance and actuarial science can be transformed into the problem of solving backward stochastic differential equations (BSDE) and partial differential equations (PDEs) with jumps, which are often difficult to solve in high-dimensional cases. To solve this problem, this paper applies the deep learning algorithm to solve a class of high-dimensional nonlinear partial differential equations with jump terms and their corresponding backward stochastic differential equations (BSDEs) with jump terms. Using the nonlinear Feynman-Kac formula, the problem of solving this kind of PDE is transformed into the problem of solving the corresponding backward stochastic differential equations with jump terms, and the numerical solution problem is turned into a stochastic control problem. At the same time, the gradient and jump process of the unknown solution are separately regarded as the strategy function, and they are approximated, respectively, by using two multilayer neural networks as function approximators. Thus, the deep learning-based method is used to overcome the “curse of dimensionality” caused by high-dimensional PDE with jump, and the numerical solution is obtained. In addition, this paper proposes a new optimization algorithm based on the existing neural network random optimization algorithm, and compares the results with the traditional optimization algorithm, and achieves good results. Finally, the proposed method is applied to three practical high-dimensional problems: Hamilton-Jacobi-Bellman equation, bond pricing under the jump Vasicek model and option pricing under the jump diffusion model. The proposed numerical method has obtained satisfactory accuracy and efficiency. The method has important application value and practical significance in investment decision-making, option pricing, insurance and other fields.

Does prospectus readability matter for bond issuance pricing? Evidence from China

We investigate the informational role of prospectus readability in determining the pricing of newly issued bonds in China. We construct a text-based measure of prospectus readability and find that less readable prospectus is associated with higher credit spread of newly issued bond. Furthermore, we then find that less readability of prospectus is associated with higher default probability of issuers, which lends support to the information manipulation view of readability. Moreover, we observe that the relationship between readability and spread is more pronounced for issuers with lower ratings and private ownership, as well as for bonds lacking external guarantees and associated with less reputable underwriters. These findings collectively highlight the importance of prospectus readability as a determinant of bond pricing in China, indicating that investors require a risk premium for bonds with inferior readability in their prospectuses.

Pricing of project finance bonds: A comparative analysis of primary market spreads

This paper provides a comparative analysis of project finance (PF) and traditional corporate finance (CF) bond spreads and pricing. Using a cross-section of 47,196 bonds issued worldwide in the 1993–2020 period, we show that PF and CF bonds are differently priced, PF bonds have higher spreads than comparable CF bonds, and although ratings are the most important pricing determinant for PF and CF bonds at issuance, investors rely on other contractual, macroeconomic, and firms' characteristics beyond these ratings. Our results do not support the hypothesis of PF transactions as mechanisms of reducing sponsoring firms' funding costs: the cost of borrowing affects financing choices and PF transactions' weighted average spread is higher than that of comparable CF bond deals. We also find that economies of scale, risk management, and information asymmetry arguments affect sponsoring firms' choice between PF and CF transactions.

Economic Policy Uncertainty and Government Bond Prices

Purpose : This paper investigated the impact of economic policy uncertainty (EPU) in the US, UK, Japan, Italy, India, Germany, France, China, Canada, and Brazil on Indian government bond prices using a new dataset of the Clearing Corporation of India Limited Broad Total Return Index (BTRI) and Liquid Total Return Index (LTRI). Methodology : We used the quantile regression approach and monthly dataset from January 2004 – December 2020 for the analysis. Findings : We found that the top 20 government bond prices decreased due to EPU in India, Japan, the US, and the UK. In contrast, the EPU of Canada, China, and the UK had a statistically significant positive impact on BTRI. Further, a negative relationship was found between the top five government bond prices and the EPU of three economies: India, Japan, and the US. Practical Implications : The analysis will help identify potential risks and vulnerabilities in government bonds. It assists regulators and policymakers in implementing effective risk management measures to safeguard financial stability. The findings will also be useful for investors and market participants to make informed investment decisions. Originality : From a data standpoint, this is the first study that used CCIL’s BTRI and LTRI data for the first time to canvass the impact of EPU on Indian government bonds as far as we know. Further, we took into account the unique characteristics of the EPU of the top 10 economies and directly compared the reaction of these economies’ EPU to the government bond price fluctuations.

Do foreign investors affect the volatility of local currency bond prices? Empirical evidence from China

How does the participation of foreign investors on local bond markets impact the volatility of bond prices and yields? An answer to this question is important for policy makers from emerging markets in their attempts to liberalize access to financial markets. However, empirical literature gives inconclusive answers to this question. Reasons are that studies analyze diverse types of bonds and apply their analyses to different samples of countries and for different phases in the opening up of markets. We add to existing knowledge by empirically investigating the impact of foreign investors' participation on the volatility of prices of two types of Chinese bonds, government bonds and policy bank bonds, as well as for three stages in the liberalization of the Chinese bond market. We find that foreign investors' participation does not exert significant effects on volatility until late in the opening of the bond market. In addition, we uncover that those bonds which are more influenced by government policies, policy bank bonds, are also more strongly affected by international capital flows. From a policy perspective, our results emphasize the importance of increasing the openness of China's local currency bond market, of stabilizing foreign investors' expectations and, in turn, international capital flows.

Laplace transforms of stochastic integrals and the pricing of Bermudan swaptions

In this paper, we derive the Laplace transforms, i.e., expected values of the exponentials, of time integrals of a class of Extended Cox–Ingersoll–Ross (CIR) processes which are given as the product of a standard CIR process and a positive deterministic function. Assuming such a process for the short-rate gives rise to an affine term structure model for which we can now provide the bond price formulas that had so far not been accessible by attempting to solve the usual Riccati equation. By conditioning the exponentiated time integral on the potential states of the integrated process at its endpoint, we obtain the building blocks to evaluate certain interest rate derivatives, namely Bermudan swaptions. This is achieved by an algorithm that determines the exercise decision at each state by comparing the available payoff with an explicit lower bound built from such conditional Laplace transforms, without resorting to estimation techniques such as American Monte Carlo.

Phase-type representations of stochastic interest rates with applications to life insurance

The purpose of the present paper is to incorporate stochastic interest rates into a matrix-approach to multi-state life insurance, where formulas for reserves, moments of future payments and equivalence premiums can be obtained as explicit formulas in terms of product integrals or matrix exponentials. To this end we consider the Markovian interest model, where the rates are piecewise deterministic (or even constant) in the different states of a Markov jump process, and which is shown to integrate naturally into the matrix framework. The discounting factor then becomes the price of a zero-coupon bond which may or may not be correlated with the biometric insurance process. Another nice feature about the Markovian interest model is that the price of the bond coincides with the survival function of a phase-type distributed random variable. This, in particular, allows for calibrating the Markovian interest rate models using a maximum likelihood approach to observed data (prices) or to theoretical models like e.g. a Vasiček model. Due to the denseness of phase-type distributions, we can approximate the price behaviour of any zero-coupon bond with interest rates bounded from below by choosing the number of possible interest rate values sufficiently large. For observed data models with few data points, lower dimensions will usually suffice, while for theoretical models the dimensionality is only a computational issue.

Green Bond Pricing and Optimization Based on Carbon Emission Trading and Subsidies: From the Perspective of Externalities

In this paper, we establish a model based on real options theory and fractional Brownian motion (FBM) with jumps to price green bonds, and thus alleviate the externalities of green bonds. We assume that the floating value of green bonds is linked to the carbon price. The carbon emission trading mechanism and government subsidy policy are introduced into this model, and the expression is derived from the stochastic differential utility framework based on the fast Fourier transform method. Based on the numerical analysis and the simulations, this paper analyzes when governments are facing financial and carbon emission constraints and how policymakers balance the allocation between carbon allowances and government subsidies to help green bonds reach the exogenous equilibrium price. Our results have implications in terms of optimizing the distribution of economic resources by the reasonable pricing of green bonds. It is in line with the current theme of global energy conservation and emission reduction, and also has certain guiding significance for the development of the carbon emission trading market.

Design and Pricing of Wenzhou Geological Disaster Risk Bond

In this paper, the direct economic losses of geological disasters in Wenzhou from 2007 to 2021 are taken as the sample data, and according to the distribution characteristics of geological disasters, considering the moral hazard, the yield and price of geological disaster bonds are calculated by using capital asset pricing model (CAPM) and bond pricing principle, so as to carry out the preliminary design of geological disaster risk bonds. Finally, based on China's market environment, this paper puts forward some suggestions on how to promote the securitization mechanism of catastrophe insurance and improve the catastrophe insurance market.

The Impact of Chinese New Budget Law on the Issuance cost of Urban Investment Bonds

Abstract In the context of the continuously increasing risk of local government debt, reducing the issuance cost of urban investment bonds have become major concerns in society. Studying the impact and mechanisms of the new budget law, implemented under a stringent regulatory environment, on the issuance cost of urban investment bonds holds significant practical implications. This paper selects balanced panel data of urban investment bonds and industrial bonds issued nationwide from 2009 to 2021 as the research sample. The multi-period difference-in-differences (DID) method is employed to examine the impact and mechanisms of relevant government actions on the issuance cost of urban investment bonds. The results indicate that the promulgation and implementation of the new budget law have reduced the issuance price and financing cost of local bonds, thereby improving the financing environment for urban investment bonds. The examination of the action mechanisms reveals that the debt repayment situation of each province in these years plays a strong moderating role in the policy's impact. Moreover, these government actions influence the pricing and financing environment of urban investment bonds by standardizing their ratings. The research conclusions of this paper hold clear policy implications, providing guidance and reference value for the work of relevant government departments. JEL classification numbers: C12, D74. Keywords: Urban investment bonds, Bond prices, Systemic financial risk.

The perception of corporate innovation and credit spreads in emerging markets: evidence from China

ABSTRACT This article is an examination of how investors in the corporate bond market in emerging economies react to patents. To empirically explore this question, we constructed a sample of 1862 Chinese corporate bonds issued between 2004 and 2020 and gathered data on Chinese domestic patents, reverse innovation patents, and the validity of patents. The empirical results suggest that domestic patents are the primary source of information for bond investors in China when evaluating corporate innovation and that investors can successfully discern between patents that are valid and those that are not. At the same time, the positive relationship between corporate innovation and bond prices is found to be negatively moderated by credit ratings and state ownership.

Sea-Level Rise Exposure and Municipal Bond Yields

Abstract Municipal bond markets began pricing sea-level rise (SLR) exposure risk in 2013, coinciding with upward revisions to worst-case SLR projections and accompanying uncertainty around these projections. The effect is larger for long-maturity bonds and not solely driven by near-term flood risk. We use a structural model of credit risk to quantify the implied economic impact and distinguish between the effects of underlying asset values and of uncertainty. The SLR exposure premium exhibits a trend different from house prices and is unaffected by house price controls. Together, our results highlight the importance of climate uncertainty in driving municipal bond prices. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online

Blockchain market and eco-friendly financial assets: Dynamic price correlation, connectedness and spillovers with portfolio implications

Since the emergence of blockchain technology, several digital assets such as cryptocurrencies, DeFi, and NFTs have gained considerable attention from investors and policymakers. However, the blockchain market has significant negative ramifications for the environment that may transmit shocks towards eco-friendly financial assets. We use the rolling window wavelet correlation (RWWC) model and the quantile-based time-varying (QVAR) connectedness framework to analyze the dynamic price correlation and connectedness between the blockchain market and green (eco-friendly) financial assets. As a representative of the blockchain market, we use the price returns of four cryptocurrencies, DeFi, and NFTs. For green equities, we use the MSCI Global Environment Price Index and the S&P Green Bond Price Index. We find a low correlation between the blockchain market and green financial assets before the outbreak of COVID-19 and a strong correlation during the COVID-19 and the Russia-Ukraine war. The quantile VAR results show symmetric connectedness of the examined and identical spillovers between extremely positive and strongly negative returns. Green bonds and stocks are the system's major shock receivers. The transmission network results imply major shock transmissions are driven by short-term frequency, whereas there is a lower transmission in the long-term.

Asymptotics for the Laplace transform of the time integral of the geometric Brownian motion

We present an asymptotic result for the Laplace transform of the time integral of the geometric Brownian motion F(θ,T)=E[e−θXT] with XT=∫0TeσWs+(a−12σ2)sds, which is exact in the limit σ2T→0 at fixed σ2θT2 and aT. This asymptotic result is applied to pricing zero coupon bonds in the Dothan model of stochastic interest rates. The asymptotic result provides an approximation for bond prices which is in good agreement with numerical evaluations in a wide range of model parameters. As a side result we obtain the asymptotics for Asian option prices in the Black-Scholes model, taking into account interest rates and dividend yield contributions in the σ2T→0 limit.