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Explaining Credit Spread Changes
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Book Synopsis Explaining Credit Spread Changes by : Jing-Zhi Huang
Download or read book Explaining Credit Spread Changes written by Jing-Zhi Huang and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the question of the determinants of corporate bond credit spreads using both weekly and monthly option-adjusted spreads for nine corporate bond indices from Merrill Lynch from January 1997 to July 2002. We find that the Russell 2000 index historical return volatility and Conference Board composite leading and coincident economic indicators have significant power in explaining credit spread changes, especially for high yield indices. Furthermore, these three variables plus the interest rate level, the historical interest rate volatility, the yield curve slope, the Russell 2000 index return, and the Fama-French [1996] high-minus-low factor can explain more than 40% of credit spread changes for five bond indexes. In particular, these eight variables can explain 67.68% and 60.82% of credit spread changes for the B- and BB rated indexes, respectively. Our analysis confirms that credit spread changes for high-yield bonds are more closely related to equity market factors and also provides evidence in favor of incorporating macroeconomic factors into credit risk models.
Book Synopsis Understanding Changes in Corporate Credit Spreads by : Doron Avramov
Download or read book Understanding Changes in Corporate Credit Spreads written by Doron Avramov and published by . This book was released on 2007 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: New evidence is reported on the empirical success of structural models in explaining changes in corporate credit risk. A parsimonious set of common factors and company-level fundamentals, inspired by structural models, was found to explain more than 54 percent (67 percent) of the variation in credit-spread changes for medium-grade (low-grade) bonds. No dominant latent factor was present in the unexplained variation. Although this set of factors had lower explanatory power among high-grade bonds, it did capture most of the systematic variation in credit-spread changes in that category. It also subsumed the explanatory power of the Fama and French factors among all grade classes.
Book Synopsis Commonality in Credit Spread Changes by : Zhiguo He
Download or read book Commonality in Credit Spread Changes written by Zhiguo He and published by . This book was released on 2019 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Two intermediary-based factors - a broad financial distress measure and a dealer corporate bond inventory measure - explain about 50% of the puzzling common variation of credit spread changes beyond canonical structural factors. A simple model, in which intermediaries facing margin constraints absorb supply of assets from customers, accounts for the documented explanatory power and delivers further implications with empirical support.
Book Synopsis Credit Spread Options for Beginners by : Freeman Publications
Download or read book Credit Spread Options for Beginners written by Freeman Publications and published by . This book was released on 2020-11-22 with total page 132 pages. Available in PDF, EPUB and Kindle. Book excerpt: What if you could get an extra $100, $200 or even $500 deposited directly into your brokerage account within the next 24 hours? That might sound impossible... but with credit spreads... it's not just a possibility... it's a certainty. Because with credit spreads, every single trade pays you when you enter it. And you can use these to generate safe returns, no matter what happens to your stock. Unlike regular options trading, you don't even need to guess the direction of a stock, or what price it will be in a month. You only have to guess a price range. And you can use this strategy to generate income on stocks you don't even own... even if those stocks are moving sideways. Plus by focusing on only the most reliable moves - you can win as often as 85 times out of every 100 trades - which means you pile up profits that others can only dream about! All of this without paying a "trading guru" thousands of dollars to learn their system. Here's just a fraction of what you'll learn inside the book: The 8 criteria we use to select the best stocks to write credit spreads - Page 85 The vital difference between naked and uncovered calls - Page 55 10 examples of stock you should never use to trade credit spreads. Amateurs do this all the time and you can lose as much as $31,000 on a single trade. Learn why these stocks are so dangerous and what to do instead - Page 86 How to automatically set up take profit levels so you only have to spend a couple minutes each month managing your trades - Page 104 Options Greeks explained in 10 minutes - Page 44 Exactly what level the VIX should be at before you sell a spread. A backtest implementing this one tweak made the strategy 50% more profitable over 10 years worth of trades - Page 96 A simple strategy for selecting the right strike price for your options - Page 160 The only 3 technical indicators you need to know for credit spreads. Ignore everything else, you only need these 3 beginner friendly metrics to get started - Page 70 No strategy is risk-free, but on page 101 we show you how to set up your trades to avoid any big losses How to find the best credit spreads stocks for free. Stock scanning services will charge you $300 a year for this information, but our approach costs nothing and lists the exact same companies - Page 81 Plus, inside the book you get free access to a 7 part video course covering every aspect of profitable investing So even if you've never used options before, the book walks you through everything step by step. You'll find everything explained in plain English, free from technical jargon. Even if you get stuck, you can always send us an email (provided inside the book) or reach out in our private investing community on social media - we're always happy to help with any questions you might have. And remember... bank CD's will only pay you between 0% and 1%... the dividend yield on the S&P 500 is around 2%... and 5 to 10 year municipal bonds will only pay between 2% and 3%. But if you use what's inside this book, you could have the opportunity to earn so much more than that. And when you receive just a single premium from one of these trades (which is paid into your account instantly) it will cover the cost of this book 10x over. To get your copy right now, just scroll up and click "add to cart"
Book Synopsis Dynamic Asset Pricing Theory by : Darrell Duffie
Download or read book Dynamic Asset Pricing Theory written by Darrell Duffie and published by Princeton University Press. This book was released on 2010-01-27 with total page 488 pages. Available in PDF, EPUB and Kindle. Book excerpt: This is a thoroughly updated edition of Dynamic Asset Pricing Theory, the standard text for doctoral students and researchers on the theory of asset pricing and portfolio selection in multiperiod settings under uncertainty. The asset pricing results are based on the three increasingly restrictive assumptions: absence of arbitrage, single-agent optimality, and equilibrium. These results are unified with two key concepts, state prices and martingales. Technicalities are given relatively little emphasis, so as to draw connections between these concepts and to make plain the similarities between discrete and continuous-time models. Readers will be particularly intrigued by this latest edition's most significant new feature: a chapter on corporate securities that offers alternative approaches to the valuation of corporate debt. Also, while much of the continuous-time portion of the theory is based on Brownian motion, this third edition introduces jumps--for example, those associated with Poisson arrivals--in order to accommodate surprise events such as bond defaults. Applications include term-structure models, derivative valuation, and hedging methods. Numerical methods covered include Monte Carlo simulation and finite-difference solutions for partial differential equations. Each chapter provides extensive problem exercises and notes to the literature. A system of appendixes reviews the necessary mathematical concepts. And references have been updated throughout. With this new edition, Dynamic Asset Pricing Theory remains at the head of the field.
Book Synopsis The Determinants of Credit Spread Changes by : Pierre Collin-Dufresne
Download or read book The Determinants of Credit Spread Changes written by Pierre Collin-Dufresne and published by . This book was released on 2011 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: Using straight industrial bonds with quoted prices, we investigate the determinants of credit spread changes. We find the variables that should in theory determine credit spread changes in fact have limited explanatory power. Further, the residuals from this first-pass regression are highly cross-correlated, and principal components analysis strongly suggests they are driven by a single common factor. We investigate several macro-economic and financial variables as candidate proxies for this factor. We cannot, however, find any set of variables which explain this common systematic factor. Our results suggest the corporate bond market is a segmented market driven by corporate bond specific supply/demand shocks.
Book Synopsis Explaining Credit Default Swap Spreads with Equity Volatility and Jump Risks of Individual Firms by : Yibin Zhang
Download or read book Explaining Credit Default Swap Spreads with Equity Volatility and Jump Risks of Individual Firms written by Yibin Zhang and published by . This book was released on 2005 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis The Determinants of Credit Spread Changes by : Pierre Collin Dufresne
Download or read book The Determinants of Credit Spread Changes written by Pierre Collin Dufresne and published by . This book was released on 1999 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Bond Market Turnover and Credit Spread Changes by : Viorel Roscovan
Download or read book Bond Market Turnover and Credit Spread Changes written by Viorel Roscovan and published by . This book was released on 2013 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recent research on default risk has shown that most of the variation in credit spreads is driven by a common yet unidentifiable factor. I find that bond turnover explains up to 11% of this variation. Using the implications of an intertemporal capital asset pricing model, I construct a bond hedging portfolio from TRACE transactions data and relate its return to changes in credit spreads. In theory, this portfolio captures the dynamic risk of the economy and, hence, hedges the risk of changes in market conditions. My findings are as follows. First, credit spreads relate asymmetrically to the return on the bond hedging portfolio. When market conditions are risky, the return on the bond hedging portfolio is positive and credit spreads increase significantly. During unchanged or less risky market conditions, the return on the bond hedging portfolio is small or negative, and credit spreads are less sensitive. Second, on average, credit spreads do not relate to a similar hedging portfolio constructed from equity volume data. The return on the stock hedging portfolio, however, captures some variation in credit spreads for riskier bond classes. Third, in contrast to the results for equity markets, where stock returns and volume are weakly related, this paper finds a strong link between volume and credit spreads in corporate bond markets.
Book Synopsis Changes in Volatility of Credit Spread and Market Efficiency During Rapid Growth of Credit Related Securities by : Christopher Hessel
Download or read book Changes in Volatility of Credit Spread and Market Efficiency During Rapid Growth of Credit Related Securities written by Christopher Hessel and published by . This book was released on 2006 with total page 23 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates the change of the credit spread volatility from 1993 to 2001. We find that credit spreads between junk grade corporate bonds and Treasury bond are significantly more volatile in the second half of this period when credit related securities become popular. However credit spreads between investment-grade corporate debt and Treasury are not significantly more volatile. For the period prior to the introduction of credit related securities, credit spread changes followed mean reverting processes. In the period with rapid growth of these new products, the credit spread changes shifted toward random walk processes. The loss of the mean reverting process with the advent of the new securities is consistent with increased market efficiency.
Book Synopsis Credit Spread Changes within Switching Regimes by : Olfa Maalaoui Chun
Download or read book Credit Spread Changes within Switching Regimes written by Olfa Maalaoui Chun and published by . This book was released on 2013 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: Empirical studies on credit spread determinants are predicated on the presence of a single-regime over the entire sample period and thus find limited explanatory power. We show that a single regime model hides the fact that the explanatory variables take on different loadings across changing patterns in credit spreads. We capture these hidden effects by modeling endogenous (rating-specific) regimes for credit spreads. We find that in a two regime-based model traditional determinants have significant explanatory power consistent with the prediction of structural models, yet their importance changes across regimes -- some variables have their effects strengthen, weaken or even reverse signs across regimes. We also investigate the differing behavior of these loadings across different specifications of the economic cycle and find that endogenous regimes best capture the hidden effects of these variables with the highest explanatory power for the same set of variables.
Book Synopsis Estimating the systematic component of credit spreads by : Sebastian Wilde
Download or read book Estimating the systematic component of credit spreads written by Sebastian Wilde and published by GRIN Verlag. This book was released on 2022-08-31 with total page 79 pages. Available in PDF, EPUB and Kindle. Book excerpt: Master's Thesis from the year 2022 in the subject Economics - Finance, grade: 1,7, University of Hagen (Fakultät für Wirtschaftswissenschaft, Lehrstuhl für Bank- und Finanzwirtschaft), language: English, abstract: Corporate bond credit spreads are much larger than historical default rates, which leads to an unexplained gap between the default premium component and total credit spread. This gap is referred to as the "credit spread puzzle" in the literature and has driven the discussion of the components of credit spreads in the past decades. The size of each component affects the decision of whether to purchase a particular class of bonds; this underlines its importance in risk management, portfolio management, and valuation. The first goal of the thesis is to provide a comprehensive review of the current state of research on how to decompose credit spreads and estimate their parts. Second, in an empirical study, the systematic risk in current EUR-denominated credit spreads is estimated and compared to the results of Elton et al. (2001). Furthermore, I analyze the regime-dependence of credit spreads for different cross-sections, as systematic risk has proven important in crisis periods. Finally, implications for the calculation of debt beta are derived as in business valuations it is possible to use a debt beta if the debt of the valuation object is subject to a systematic risk that leads to a signifcant risk premium demanded by debt providers. I show that the systematic part of the credit spread for observed EUR-denominated bond spreads from 2009 to 2021 can be assumed higher than in the US bond market, is regime-dependent and would have direct implications on the calculation and relevance of a debt beta for business valuations.
Book Synopsis Explaining the Level of Credit Spreads by : Martijn Cremers
Download or read book Explaining the Level of Credit Spreads written by Martijn Cremers and published by . This book was released on 2005 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt: Prices of equity index put options contain information on the price of systematic downward jump risk. We use a structural jump-diffusion firm value model to assess the level of credit spreads that is generated by option-implied jump risk premia. In our compound option pricing model, an equity index option is an option on a portfolio of call options on the underlying firm values. We calibrate the model parameters to historical information on default risk, the equity premium and equity return distribution, and S & P 500 index option prices. Our results show that a model without jumps fails to fit the equity return distribution and option prices, and generates a low out-of-sample prediction for credit spreads. Adding jumps and jump risk premia improves the fit of the model in terms of equity and option characteristics considerably and brings predicted credit spread levels much closer to observed levels.
Book Synopsis Credit Spread Changes Within Switching Regimes by :
Download or read book Credit Spread Changes Within Switching Regimes written by and published by . This book was released on 2009 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Credit Spreads, Bond Index Changes and Bond Diversification by : Wassim Dbouk
Download or read book Credit Spreads, Bond Index Changes and Bond Diversification written by Wassim Dbouk and published by . This book was released on 2007 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis consists of four essays. In the first essay, we reexamine how default, taxes and systematic risk measures influence corporate credit spreads for investment grade corporate bonds for the 1987-1996 time period using a modified version of the methodology used in Elton, Gruber, Agrawal, and Mann (2001). The methodological improvements not only change the estimates for the default and tax components of credit spreads materially but the factors from the Fama and French three-factor model no longer help to explain the remaining variation in credit spreads. In contrast, a good portion of the variation in the remaining (unexplained) spread is explained by measures of aggregate bond liquidity. In the second essay, unlike the literature that deals extensively with the diversification of stock portfolios, we investigate diversification benefits for bond portfolios and the optimal portfolio size to achieve a low marginal benefit from increased portfolio size. Since the classic paper on bond diversification by McEnally and Boardman (1979), the structure of the bond market has changed significantly and many risk metrics have been introduced into the literature. In this essay, we use various risk metrics to assess the diversification benefits and the optimal bond portfolio sizes based on investment opportunity sets differentiated by credit ratings, issuer type and term to maturity. Our results suggest that a portfolio size of 25 to 40 bonds could be optimal since going beyond this size achieves a marginal diversification benefit of less than 1%. In the third essay, we formulate and test an alternate model for explaining the changes in corporate credit spreads. The model includes some new potential determinants (such as undiversifiable risk) and uses ex ante (forecast) data from Consensus Economics instead of realizations for other determinants previously identified in the literature. Compared to other models previously tested in the literature, our model achieves substantially higher explanatory power while being more parsimonious. Finally, in the fourth essay, we introduce what appears to be the first investigation of the impact of bond index additions and deletions on the returns of bonds and stocks of the same-firm issuers using various unconditional and conditional return-generating models. The effect of additions and deletions is symmetric for each asset class and robust across various return-generating models. While bond returns are positively (negatively) affected by bond index inclusions (exclusions), stock returns are unaffected by these bond index revisions. These results suggest that, although bond index additions and deletions materially affect bond values when measured at market, equity investors do not perceive any material change in financial risk from such changes.
Book Synopsis Treasury Yields and Credit Spread Dynamics by : Dimitris A. Georgoutsos
Download or read book Treasury Yields and Credit Spread Dynamics written by Dimitris A. Georgoutsos and published by . This book was released on 2015 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: The purpose of this paper is to shed new light on the conflicting empirical evidence on the relationship between credit spreads and Treasury rates. Following a general-to-specific modelling approach, we were unable to accept the presence of a long-run relationship between Baa credit spreads and long-term Treasury rates. At the same time, and in support of the structural models on credit risk modelling, a negative short-run relationship was obtained by means of impulse response functions. Subsequently, by employing a regime-switching estimation technique, we were able to establish the importance of the Treasury yield curve slope for the Baa credit spread determination in periods characterized by low interest rate volatility. Finally, we were able to provide evidence of an asymmetric response of the Baa credit spread to term spread changes according to the source of these changes, i.e. short or long term Treasury rates.
Book Synopsis Corporate Credit Risk Changes by : Doron Avramov
Download or read book Corporate Credit Risk Changes written by Doron Avramov and published by . This book was released on 2006 with total page 27 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper provides new evidence on the empirical success of structural models in explaining corporate credit risk changes. A parsimonious set of common factors and firm-level fundamentals, inspired by structural models, explains more than 54% (67%) of the variation in credit spread changes for medium (low) grade bonds. No dominant latent factor is present in the unexplained variation. While our set of variables has lower explanatory power among high-grade bonds, it does capture most of the systematic variation of credit spread changes in that category as well. It also subsumes the explanatory power of the Fama and French (1993) factors among all grade classes.
