Bond Prices Research Articles

The effect of ASC 842 leases on bond yields

This study examines how the formal recognition of lease liabilities required by ASC 842 affects corporate bonds pricing. We document significant bond yield increases with the unexpected off-balance sheet liability revealed by the company. The yield reaction displays an asymmetric pattern, with an increase in yields for previously underestimated operating lease liabilities, but no correction for overestimations. Credit ratings are more likely to be downgraded at firms with severely underestimated operating leases. Collectively, our results suggest that ASC 842 has implications for corporate bond pricing.

Pricing of insurance-linked securities: a multi-peril approach

In this paper we build a methodology for pricing of insurance-linked securities which are tied to multiple natural catastrophe perils. As a representative example, we construct a multi-peril catastrophe (CAT) bond which can be linked to the industry loss indices or actual losses incurred by an insurer. We provide pricing formulas for such CAT bonds. We illustrate the introduced methodology on the US natural catastrophe data obtained from Property Claim Services (PCS). Within this dataset, we specifically examine two types of risks: losses associated with wind and thunderstorm events, and those linked to winter storm events. Then, we fit and validate the underlying compound non-homogeneous Poisson processes taking into account the fact that the data are left-truncated. The best fitted loss distributions appear to be Burr and Generalised Extreme Value and for the first peril and log-normal for the second. Finally, we visualise the zero-coupon CAT bond prices for the selected best-fitted models.

The investment of renewable energy: Is green bond a safe-haven to hedge U.S. monetary policy uncertainty?

This paper uses the bootstrap rolling-window Granger causality test to investigate the relationship between U.S. monetary policy uncertainty and green bond. The method addresses the limitations of ignoring the instability of coefficients and the time-varying relationship between the variables in previous literature. The results find both insignificant and significant relationship in the full period. One explanation of the insignificant relationship is that the changes of investor sentiment influence their judgment regarding to the monetary policy uncertainty and green bond, and thus the significance of the relationship between the variables. Besides, this paper finds the significant inter-relationship is time-varying. Specifically, in the sub-period when the market sentiment is low, the rising monetary policy uncertainty influences green bond price negatively. Meanwhile, the unexpected changes of green bond may also have both positive and negative effects on monetary policy uncertainty in different sub-periods. Thus, this paper proposes that the impact mechanism between the variables is effective when the investors are irrational. Furthermore, the findings may provide valuable implications for investors and governments, including adjusting investment strategy when the monetary policy is unclear, increasing monetary policy transparency, and monitoring speculative activity in green bond market. In addition, it is necessary to emphasize that the validity of the findings is limited to the U.S. and the period when investors’ sentiment experience large fluctuations. Finally, future research may consider expand the analysis to the green stock, as it is another important channel for renewable energy investment.

The pricing of green bonds: Does social capital matter? Evidence from China

This paper examines the relation between the level of regional societal trust and the cost of green bonds. We conduct empirical estimation on 330 green bonds issued in China from 2016 to 2019, and find that a higher level of provincial societal trust can significantly reduce the spread premium of green bonds. Further investigation reveals that because generalized social capital can take the place of an individual's particular social capital, trust has a more pronounced effect on bond spread when the issuer's ultimate controller has a less extensive social network.

Corporate debt value under transition scenario uncertainty

AbstractWe develop a structural model for pricing a defaultable bond issued by a company subject to climate transition risk. We assume that the magnitude of the transition risk impacts depends on a transition scenario, which is initially unknown but is progressively revealed through the observation of the carbon tax trajectory. The bond price, credit spread, and optimal default/restructuring thresholds are then expressed as function of the firm's revenue level and the carbon tax. Numerical implementation of the resulting formulas is discussed and illustrated using real data. Our results show that under transition scenario uncertainty, carbon tax adjustments are more likely to trigger a default than when the true scenario is known because after each adjustment, the more environmentally stringent scenario becomes more likely. We also find that faster discovery of scenario information leads to higher credit spreads since better information allows the shareholders to optimize the timing of default, increasing the value of default option and decreasing the bond price. As an extension, we consider the situation where the company may invest into abatement technology, increasing the value of both the share price and the bond price.

The value of resilience bond in financing flood resilient infrastructures: a case study of Towyn

ABSTRACT As catastrophic events become increasingly frequent, infrastructure systems face rising challenges from the dynamic environment. Enhancing the resilience of the current infrastructure system in advance has emerged as an essential strategy for catastrophe preparedness. This study explores the novel concept of resilience bonds in the context of financing flood-resilient infrastructures, using the Towyn Flood as a case study. It examines the mechanism of resilience bonds in developing infrastructure capable of withstanding floods, analysing the resilience bond value and the factors influencing its valuation. Simulation results indicate that resilience bonds can significantly extend investment resources, enhancing flood resilience and reducing unforeseen flooding risks. A sensitivity analysis provides detailed insights into how various factors impact the resilience bond's pricing model. These findings offer critical guidance for decision-makers considering the implementation of resilience bonds in flood-prone areas, highlighting their potential to improve infrastructure resilience against catastrophic events.

The Study of Bond Spreads and Credit Ratings in Honduras

This research rigorously examines the intricate influences on Honduras' cost of borrowing from 2013 to 2022. The study employs the Corruption Perceptions Index (CPI) and Standard and Poor's as main determinants. Control variables include macroeconomic fundamentals that pertain to a country’s performance such as GDP growth, inflation and international reserves, fiscal variables such as debt-to-GDP ratio, and the central administration’s balance, and global factors such as global risk aversion measured by the Chicago Board Options Exchange's CBOE Volatility Index (VIX) and U.S rates. The study finds that country-specific fundamentals, global factors, corruption perceptions, sovereign credit ratings, and political risk all play significant roles in influencing Honduras’ cost of borrowing. It also exposes the limitations of credit ratings in capturing the truth about bond pricing in Honduras. These findings highlight the complex interplay of economic, global, and sociopolitical factors in shaping Honduras' bond spreads, emphasizing the need for a comprehensive approach to credit risk assessment and bond market analysis. The results from this research contribute to economic stability strategies for policymakers, enhance understanding for economists, and assists investors and financial analysts in making informed decisions based on identified variables impacting bond spreads.

Inflation expectations and risk premia in emerging bond markets: Evidence from Mexico

To study inflation expectations and associated risk premia in emerging bond markets, we provide estimates for Mexico based on an arbitrage-free dynamic term structure model of nominal and real bond prices that accounts for their liquidity risk. Beyond documenting the existence of large and weakly correlated liquidity premia in nominal and real bond prices, our results indicate that long-term inflation expectations in Mexico are well anchored close to the Bank of Mexico’s inflation target. Furthermore, Mexican inflation risk premia are larger and more volatile than those in Canada and the United States.

Efficient likelihood estimation of Heston model for novel climate-related financial contracts valuation

We propose novel Bitcoin-denominated derivatives contracts on carbon bonds. We consider a futures contract on carbon bonds where its price is expressed in terms of bitcoins. Then, we put forward options on a futures contract of the former type. Governments can use such contracts to hedge climate change and influence the prices of carbon bonds and cryptocurrencies. We show how these derivatives transfer volatility to the bitcoin market without a negative effect in the carbon bonds market. Since the aforementioned options are not yet traded in the market, we price them by assuming that the underlying is driven by the well-known Heston model, where the model parameters are estimated by a novel method based on Shannon wavelets. Heston model belongs to the class of stochastic volatility (SV) models. The discrete observations from the SV model can be seen as a state-space model, that is, a stochastic model in discrete-time which contains two sets of equations, the state equation and the observation equation. While the first describes the transition of a latent process in time, the second shows how an observer measures the latent process at each time period. We infer the properties of the latent variable by means of a filtering algorithm, and we estimate the parameters of the model via maximum likelihood. The evaluation of the likelihood function is a time-consuming task that involves updating and prediction steps of the state variable, leading to the computation of complicated integrals. We calculate these integrals by means of an integration method based on Shannon wavelets, and compare the root mean square error (RMSE) of the estimation with state-of-the-art methods. The results show that the RSME is dramatically reduced in a short CPU time with the use of wavelets.

Evaluation of bitcoin options with interest rate risk and systemic risk

This study introduces closed-form formulas for valuing European call options, assuming that Bitcoin follows a compound Poisson process. Additionally, instantaneous forward interest rates are considered in the Heath-Jarrow-Morton model, which includes a jump component. To address the impacts of systematic risk on Bitcoin price and interest rate, we model two stochastic processes using a correlated bivariate jump-diffusion model to capture individual jumps and systematic co-jumps. This study provides analytic formulas for pricing Bitcoin call options and zero-coupon bonds under the correlated jump-diffusion Heath-Jarrow-Morton model. Numerical analysis shows how co-jump intensity affects the prices of both zero-coupon bonds and Bitcoin call options. We specifically look at how these prices change in response to co-jump intensity across three different instantaneous forward rate term structures. The findings show that the prices of Bitcoin call options are contingent on the term structure types of zero-coupon bonds. In addition, the interaction of co-jump intensity and types of term structure also affects Bitcoin option prices. The practical significance of this study is to provide a comprehensive model to evaluate Bitcoin call options and enhance risk management strategies in the Bitcoin market when the Bitcoin market encounters changes in monetary policy or changes in macroeconomic conditions.

PENGARUH DURASI DAN CONVEXITY TERHADAP HARGA OBLIGASI PADA PERUSAHAAN PERBANKAN YANG TERDAFTAR DI BURSA EFEK INDONESIA PERIODE 2017-2021

This research aims to determine and explain the effect of duration and convexity on bond prices in banking companies listed on the Indonesia Stock Exchange for the 2017-2021 period. To achieve this aim, research was carried out using purposive sampling techniques, thus obtaining a sample of 11 banking companies that issued bonds with a research period of five years. The analysis model used is a multiple linear regression model. The research results show that: First, duration has a positive and significant effect on bond prices, convexity has a positive and insignificant effect on bond prices. The ability of duration and convexity to explain variations in bond prices is 2.9 percent. Second, duration has a positive and significant effect on bond prices, convexity has a negative and significant effect on bond prices in the discount price group. Duration has a positive and significant effect on bond prices, convexity has a positive and significant effect on bond prices in the premium price group. The ability of duration and convexity to explain variations in bond prices is in the range of 92.8-94.4 percent.

The Impact of Credit Rating Adjustments on Bond Spreads: Evidence from China

Given the critical role of credit ratings in signaling issuer creditworthiness and influencing investor behavior, this paper aims to elucidate how adjustments in these ratings affect bond market spreads. Utilizing a comprehensive dataset spanning from 2016 to 2022, this research focuses on the Chinese bond market. Through regression analysis and heterogeneity tests, the findings reveal that credit rating adjustments significantly influence bond spreads, with upgrades narrowing spreads and downgrades widening them. Additionally, adjustments related to external support and firm performance also affect spreads, highlighting the importance of managing credit ratings for issuers. Overall, this study offers insights for investors, issuers, regulators, and academics, providing a better understanding of the dynamics between credit rating adjustments and bond pricing in China’s bond market, with implications for financial stability and economic development.

Regulation and the demand for credit default swaps in experimental bond markets

Credit default swaps (CDS) played an important role in the financial crisis of 2008 leading to calls for regulation. Here, we seek to understand the impact of a CDS regulation that restricts the possibility to hold naked CDS. We use a controlled laboratory experiment analyzing CDS pricing in a bond market subject to default risk. Our results show that the regulation achieves the goal of increasing the use of CDS for hedging purposes while reducing the use of CDS for speculation. This success does not come at the expense of lower initial public offering (IPO) prices for the bonds or worse pricing of bonds or CDS in the secondary market.

The Impact of Liquidity Risk on Corporate Bond Pricing in China

This paper investigates the impact of liquidity risk on bond pricing in the bond market after the end of COVID-19. The paper hypothesizes a significant impact of liquidity risk on bond pricing in the bond market and introduces several variables such as liquidity ratio, coupon rate, issuance cycle, return on equity (ROE), and issuance volume for testing. The paper analyses and compares the impact of liquidity risk on corporate bond pricing through least squares (OLS) regression analysis (data from the iFinD database). The study shows that the liquidity risk of bonds has a significant impact on the market interest rate of corporate bonds, which directly proves that the impact of liquidity risk on corporate bond pricing in the bond market is highly significant. This paper reveals that liquidity risk is crucial to bond pricing in the bond market that liquidity risk is a key factor in determining the degree of stability of bond prices, and that illiquidity leads to increased uncertainty in bond pricing and market volatility. Investors need to have a more comprehensive perspective to rationally price bonds under the disturbance of liquidity risk and pay attention to the impact of liquidity risk on the bond market.

Two-Factor Convertible Bond Pricing with Pull-to-Par

Two-Factor Convertible Bond Pricing with Pull-to-Par

Assessing the predictability of the Bank of Russia decisions on the key rate and informational advantage in its forecasting

The communication policy of central banks plays a significant role in setting the expectations of economic agents. If key rate decisions are inconsistent with market expectations, managing expectations and anchoring inflation expectations may be difficult. We assess the predictability of the Bank of Russia’s key rate decisions over the 2021—2023 period in two ways: using media surveys of analysts and shifts in the Russian government bond index and the daily volatility of its yield. The results show a significant impact of unexpected key rate decisions on Russian government bond prices and daily volatility. Then, using statistical metrics computed from macroeconomic survey data and another linear and piecewise linear model, we find the informational advantage of the Bank of Russia in predicting the key rate. The decisions unexpected for the market are explained by the information advantage of the Bank of Russia, as well as the realization of geopolitical and inflation risks in the period under study. Thus, we conclude that there is a need to improve the quality of communication regarding future decisions. As the communication policy develops, the predictability of the Bank of Russia’s decisions on the key rate will increase. In turn, economic agents and market participants will adapt to the expected decisions in advance, which will accelerate the achievement of the inflation target and the adjustment of inflation expectations.

Decomposition of Disaster Region using Earthquake Parameter and STDM Distance: Catastrophe Bond Pricing Single Period

Investor interest in single-regional earthquake catastrophe bonds has the potential to decline in the future. To pique investor interest, disaster bond prices can be determined by decomposed disaster zones using seismic parameters and Space Time Depth Magnitude (STDM) distance. Therefore, this study aims to develop a Decomposition of Disaster Region Using Earthquake Parameters and STDM Distance on the Earthquake Catastrophe Bond Pricing (DECBP) model for a single period. The basic idea of developing the model is to observe earthquake characteristics in an area by clustering the area based on the Earthquake Disaster Risk Index (EDRI), earthquake parameters (earthquake magnitude and depth), and STDM distance. The research and development (R&D) methodology used in this work is pursued through the creation of a mathematical model for calculating the price of earthquake catastrophe bonds over a single period. The development stages carried out are regional decomposition modelling, payment functions modelling, distribution of extreme earthquake magnitude values modelling, prediction of interest rates and coupons, numerical simulations, and analysis of the effect of interest rates, coupons, and the amount of regional decomposition on earthquake bond prices. Interest rates, coupons, and the number of regional decompositions that affect bond prices for earthquake events are the results of the analysis of the model that's been developed. The resulting model in this study is expected to assist the Super Purpose Vehicle (SPV) in determining the price of earthquake bonds and serve as a reference for future researchers developing models for the price of earthquake catastrophe bonds.

Quantitative Easing, Bond Risk Premia and the Exchange Rate in a Small Open Economy

We assess the impact of large-scale asset purchases, commonly known as quantitative easing (QE), conducted by Sveriges Riksbank and the European Central Bank (ECB) on bond risk premia in the Swedish government bond market. Using a novel arbitrage-free dynamic term structure model of nominal and real bond prices that accounts for bond-specific safety premia, we find that Sveriges Riksbank’s bond purchases raised inflation and short-rate expectations, lowered nominal and real term premia and inflation risk premia, and increased nominal bond safety premia, suggestive of signaling, portfolio rebalance, and safe asset scarcity effects. Furthermore, we document spillover effects of ECB’s QE programs on Swedish bond markets that are similar to the Swedish QE effects only after controlling for exchange rate fluctuations, highlighting the importance of exchange rate dynamics in the transmission of QE spillover effects.

A fiscal theory of central bank’s solvency: Perils of the quantitative and qualitative monetary easing

The Bank of Japan has purchased long-term Japanese government bonds under the Quantitative and Qualitative Monetary Easing (QQE). To study monetary policy after the Bank of Japan exits the QQE, we develop a model in which the fiscal authority commits: (ⅰ) not to making fiscal adjustments needed to stabilize government debt and (ⅱ) not to providing financial supports for the central bank that incurs losses on its balance sheet due to a decline in the price of long-term bonds. Within this framework, this study investigates how the interaction between these commitments reduces the ability of monetary policy to control inflation after liftoff from the zero lower bound. We consider a situation in which the central bank that holds long-term bonds raises the nominal interest rates and show two key results: (ⅰ) when the Taylor principle is violated, under certain conditions, inflation right after liftoff cannot overshoot the central bank’s target; (ⅱ) when the central bank follows the Taylor principle, under certain conditions, it cannot prevent the economy from converging to the deflationary steady state.

Sovereign debt and credit default swaps

How do credit default swaps (CDS) affect sovereign debt markets? We analyze how liquidity, exposure to default risk, and regulation affect the answer to this question using a sovereign debt model where investors trade bonds and CDS over the counter via directed search. Restricting portfolios can improve bond prices and bond-market activity, but the net effect depends on relative frictions in bond and CDS markets, the exposure of investors, and how the sovereign responds to the policy. Our novel identification strategy exploits confidential microdata to quantify trading frictions and the exposure distribution. The calibrated model generates realistic CDS-bond basis deviations, bid–ask spreads, and CDS volumes and positions. Our baseline specification predicts trading frictions and an inability to short sell bonds significantly improves sovereign debt prices, but policies that restrict CDS trading have small effects.