Research
Working Papers:
1. Managerial learning in the corporate bond market, job market paper
Draft available upon request
Abstract:
This study demonstrates that firm managers actively learn from their corporate bond prices when making capital investment decisions. The positive firm investment-bond q sensitivity is particularly pronounced when bonds are more liquid with greater incentives for informed trading. Conversely, the investment-bond q sensitivity shows a negative response to the institutional sell-herding measure, which identifies non-fundamental-based price changes. This corporate bond prices learning channel makes extra contributions alongside the equity learning channel, providing evidence to the argument of the better empirical predictability of bond prices on firms’ investment. Notably, the bond learning channels are more significant in the firms of low-rating, high-illiquid, closer to default, and shorter maturity.
2. Global Evidence on Unspanned Macro Risks in Dynamic Term Structure Model, with Michel van der Wel
Presented at Erasmus University Rotterdam, EEA 2020, CICF 2021, EcoMod 2021, SoFiE 2022*
Abstract:
There are mixed results on whether macro risks are spanned by the yield curve. This paper reviews the major arguments and takes a global perspective to obtain comprehensive evidence. We study a large cross-section of 22 countries, including both developed and emerging markets. Our regression evidence confirms that macro information provides explanatory power for bond excess returns on top of yield factors, in fact more so for emerging than for developed countries. This finding is particularly strong in emerging markets. From a mechanical perspective, discriminating between spanned and unspanned models when considering in-sample fit and term premium predictions makes no difference, while Sharpe ratios are more realistic for unspanned models.
3. Extrapolation of Minimum Daily Returns and Corporate Bond Pricing, with Tse-Chun Lin
Abstract:
We find that the lower the corporate bond minimum daily returns in the previous month, the higher the subsequent month’s excess returns in the cross-section. The annualized differences in one-month holding returns between the lowest and the highest minimum daily returns deciles are 6.24% and 6% for equal-weighted and value-weighted portfolios, respectively. This return predictability is stronger when the minimum daily return occurs on days closer to the month-end, suggesting that investors overextrapolate the extremely negative daily returns in corporate bond pricing. The return predictability is robust to controlling for other bond characteristics including, illiquidity, downside risk, idiosyncratic volatility, etc.
4. Dollar and Carry Redux, with Sining Liu, Thomas Maurer and Andrea Vedolin
Abstract:
Contrary to existing literature, we establish that two factors, dollar and carry, suffice to explain a large cross-section of currency returns with R2s exceeding 80%. Our paper highlights the importance of accounting for time-variation in conditional moments. Unconditional estimations that ignore this time-variation mistakenly reject the two factor model. We propose a parsimonious framework to estimate conditional currency factor models and provide testable restrictions. Our findings imply that currency markets are well described by a model in which (i) each country-specific SDF loads on one country-specific-dollar-and one global-carry-shock, and (ii) risk loadings are time-varying. Other risk factors proposed in the literature are useful to describe the time variation in dollar and carry factor risk premia. in conditional moments of DOL and CAR and conditional factor loadings.
Abstract:
We document a novel salience effect in the US corporate bond market. We find that bonds with lower salience theory (ST) value have higher returns in the subsequent month. The annualized differences in one-month holding excess returns between the lowest and highest ST deciles are 3.84% and 4.44% for equal-weighted and value-weighted portfolios. However, the salience effect is only exhibited in the most salient downside returns. These results indicate that corporate bond investors overweight salient negative returns when forming their expectations of future returns. Consequently, bonds with salient downside returns are undervalued and yield higher returns in the subsequent month.
*Presented by coauthor.