Conference Agenda

Please note that all times are shown in the time zone of the conference. The current conference time is: 1st Nov 2024, 12:02:16am CET

 
 
Session Overview
Session
AP 20: Bond Pricing in Credit Markets
Time:
Saturday, 19/Aug/2023:
11:30am - 1:00pm

Session Chair: Florian Nagler, Bocconi University
Location: 1A-33 (floor 1)


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Presentations
ID: 1993

Breaking the Correlation between Corporate Bonds and Stocks: The Role of Asset Variance

Alexandre Jeanneret1, Alexander Dickerson2, Philippe Mueller2, Mathieu Fournier1

1University of New South Wales, Australia; 2Warwick Business School

Discussant: Jaewon Choi (University of Illinois Urbana-Champaign)

We show that firm default risk is the primary predictor of the correlation between corporate bond and stock returns, both in the cross-section and over time. Bonds of less creditworthy firms behave more like the issuing firms’ stocks, resulting in higher future comovement. As a direct implication, investing in bonds and stocks of the most creditworthy firms significantly enhances diversification benefits and Sharpe ratios out-of-sample. We develop a structural model with stochastic asset variance that rationalizes these findings, whereby time-variation in asset variance plays a critical role for breaking down the perfect stock-bond correlation implied by the Merton model.

EFA2023_1993_AP 20_1_Breaking the Correlation between Corporate Bonds and Stocks.pdf


ID: 321

Pushing Bonds Over the Edge: Monetary Policy and Municipal Bond Liquidity

John Bagley1, Stefan Gissler2, Kent Hiteshew3, Ivan Ivanov4

1MSRB; 2Federal Reserve Board; 3Affiliation not Provided; 4FRB Chicago

Discussant: Christian Kubitza (European Central Bank)

We examine the role of institutional investors in monetary policy transmission to asset markets by exploiting a discontinuous threshold in the tax treatment of municipal bonds. As bonds approach the threshold, mutual funds, the primary institutional traders in the market, dispose of the bonds at significant risk of falling below the threshold. This is driven by mutual funds anticipating future illiquidity. Once bonds cross the threshold, their liquidity declines and illiquidity-induced yield spreads increase substantially as retail investors become more important in price formation. Unexpected monetary policy tightening sharply reduces trading activity, amplifying the path to illiquidity in the market.

EFA2023_321_AP 20_2_Pushing Bonds Over the Edge.pdf


ID: 998

Implementable Corporate Bond Portfolios

Giorgio Ottonello1, Maximilian Bredendiek2, Rossen Valkanov3

1Nova School of Business and Economics, Portugal; 2Independent; 3Rady School of Management, University of California San Diego

Discussant: Tomas Jankauskas (Tilburg University)

We investigate the scope for active investing in corporate bonds by estimating an optimal portfolio using asset characteristics. Our portfolio weights are modeled to account for the severe trading frictions present in OTC bond markets. A portfolio based on maturity, rating, coupon, and size outperforms passive benchmarks and univariate sorts after transaction costs in and out of sample. Further, it predicts macroeconomic activity, suggesting bond characteristics provide hedging against macro-fluctuations. Active funds appear constrained by narrow investment mandates from holding the optimal portfolio. Overall, while active corporate bond portfolios are feasible, institutional constraints might limit their accessibility.

EFA2023_998_AP 20_3_Implementable Corporate Bond Portfolios.pdf


 
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