The side effects of quantitative easing:evidence from the UK bond market

We examine the returns to UK government bonds before, during and between the phases of quantitative easing to identify the side effects for the market itself. We show that the onset of QE led to a sustained reduction in the costs of trading and removed some return regularities. However, controlling for a wide range of market activity, including issuance and QE announcements, we find evidence that investors could have earned excess returns after costs by trading in response to the purchase auction calendar. Drawing on economic theory, we explore the implications of these findings for both the efficiency of the market and the costs of government debt management in both the short and long run.

Secondary market pricing behaviour around UK bond auctions

Using an event study approach, this article reports evidence that the UK Treasury bond market displayed anomalous pricing behaviour in the secondary market both immediately before and after auctions of seasoned bonds. Using a benchmark return derived from the behaviour of the underlying yield curve, the market offered statistically and economically significant excess returns, around the auctions held between 1992 and 2004. A cross-sectional analysis of the cumulative excess returns shows that the excess demand at the auctions is a key determinant of this excess return.

Measuring spillover effects in Euro Area equity and bond markets

Since its inception, the Eurozone has experienced significant financial integration. However, with the recent turbulent period, the dynamics of this integration may have changed. This study analyses the volatility spillovers from the US and aggregate Eurozone markets into ten Euro Area national equity and bond markets, using a regime-switching model with shifting shock sensitivities. The evidence confirms an increased impact of shock spillover intensity after the 2008 crisis in the equity market and a decrease of the same parameters for the bond market. In both markets, the overall impact of the Eurozone is greater when compared to the U.S.

Debt and deficit fluctuations and the structure of bond markets

We analyse the implications of optimal taxation for the stochastic behaviour of debt. We show that when a government pursues an optimal fiscal policy under complete markets, the value of debt has the same or less persistence than other variables in the economy and it declines in response to shocks that cause the deficit to increase. By contrast, under incomplete markets debt shows more persistence than other variables and it increases in response to shocks that cause a higher deficit. Data for US government debt reveals diametrically opposite results from those of complete markets and is much more supportive of bond market incompleteness.

Quantiles of the Realized Stock-Bond Correlation

Abstract: We scrutinize the realized stock-bond correlation based upon high frequency returns. We use quantile regressions to pin down the systematic variation of the extreme tails over their economic determinants. The correlation dependence behaves differently when the correlation is large negative and large positive. The important explanatory variables at the extreme low quantile are the short rate, the yield spread, and the volatility index. At the extreme high quantile the bond market liquidity is also important. The empirical fi…ndings are only partially robust to using less precise measures of the stock-bond correlation. The results are not caused by the recent …financial crisis. Keywords: Extreme returns; Financial crisis; Realized stock-bond correlation; Quantile regressions; VIX. JEL Classifi…cations: C22; G01; G11; G12

Determinants of credit default swap spread: evidence from european credit derivatives market

Tämän tutkielman tavoitteena on selvittää, mitkä tekijät vaikuttavat yrityksen ja valtion velkakirjojen väliseen tuottoeroon. Strukturaalisten luottoriskin hinnoittelumallien mukaan luottoriskiin vaikuttavia tekijöitä ovat yrityksen velkaantumisaste, volatiliteetti ja riskitön korkokanta. Tavoitteena on erityisesti tutkia, kuinka hyvin nämä teoreettiset tekijät selittävät tuottoeroja ja onko olemassa muita tärkeitä selittäviä tekijöitä. Luottoriskinvaihtosopimusten noteerauksia käytetään tuottoerojen määrittämiseen. Selittävät tekijät koostuvat sekä yrityskohtaisista että markkinalaajuisista muuttujista. Luottoriskinvaihtosopimusten ja yrityskohtaisten muuttujien data on kerätty yhteensä 50 yritykselle Euroalueen maista. Aineisto koostuu kuukausittaisista havainnoista aikaväliltä 01.01.2003-31.12.2006. Empiiriset tulokset osoittavat, että strukturaalisten mallien mukaiset tekijät selittävät vain pienen osan tuottoeron muutoksista yli ajan. Toisaalta nämä teoreettiset tekijät selittävät huomattavasti paremmin tuottoeron vaihtelua yli poikkileikkauksen. Muut kuin teoreettiset tekijät pystyvät selittämään suuren osan tuottoeron vaihtelusta. Erityisen tärkeäksi tuottoeron selittäväksi tekijäksi osoittautui yleinen riskipreemio velkakirjamarkkinoilla. Tulokset osoittavat, että luottoriskin hinnoittelumalleja on kehitettävä edelleenniin, että ne ottaisivat huomioon yrityskohtaisten tekijöiden lisäksi myös markkinalaajuisia tekijöitä.

Essays on pricing of risk and international linkage of Russian stock market

Last two decades have seen a rapid change in the global economic and financial situation; the economic conditions in many small and large underdeveloped countries started to improve and they became recognized as emerging markets. This led to growth in the amounts of global investments in these countries, partly spurred by expectations of higher returns, favorable risk-return opportunities, and better diversification alternatives to global investors. This process, however, has not been without problems and it has emphasized the need for more information on these markets. In particular, the liberalization of financial markets around the world, globalization of trade and companies, recent formation of economic and regional blocks, and the rapid development of underdeveloped countries during the last two decades have brought a major challenge to the financial world and researchers alike. This doctoral dissertation studies one of the largest emerging markets, namely Russia. The motivation why the Russian equity market is worth investigating includes, among other factors, its sheer size, rapid and robust economic growth since the turn of the millennium, future prospect for international investors, and a number of important major financial reforms implemented since the early 1990s. Another interesting feature of the Russian economy, which gives motivation to study Russian market, is Russia’s 1998 financial crisis, considered as one of the worst crisis in recent times, affecting both developed and developing economies. Therefore, special attention has been paid to Russia’s 1998 financial crisis throughout this dissertation. This thesis covers the period from the birth of the modern Russian financial markets to the present day, Special attention is given to the international linkage and the 1998 financial crisis. This study first identifies the risks associated with Russian market and then deals with their pricing issues. Finally some insights about portfolio construction within Russian market are presented. The first research paper of this dissertation considers the linkage of the Russian equity market to the world equity market by examining the international transmission of the Russia’s 1998 financial crisis utilizing the GARCH-BEKK model proposed by Engle and Kroner. Empirical results shows evidence of direct linkage between the Russian equity market and the world market both in regards of returns and volatility. However, the weakness of the linkage suggests that the Russian equity market was only partially integrated into the world market, even though the contagion can be clearly seen during the time of the crisis period. The second and the third paper, co-authored with Mika Vaihekoski, investigate whether global, local and currency risks are priced in the Russian stock market from a US investors’ point of view. Furthermore, the dynamics of these sources of risk are studied, i.e., whether the prices of the global and local risk factors are constant or time-varying over time. We utilize the multivariate GARCH-M framework of De Santis and Gérard (1998). Similar to them we find price of global market risk to be time-varying. Currency risk also found to be priced and highly time varying in the Russian market. Moreover, our results suggest that the Russian market is partially segmented and local risk is also priced in the market. The model also implies that the biggest impact on the US market risk premium is coming from the world risk component whereas the Russian risk premium is on average caused mostly by the local and currency components. The purpose of the fourth paper is to look at the relationship between the stock and the bond market of Russia. The objective is to examine whether the correlations between two classes of assets are time varying by using multivariate conditional volatility models. The Constant Conditional Correlation model by Bollerslev (1990), the Dynamic Conditional Correlation model by Engle (2002), and an asymmetric version of the Dynamic Conditional Correlation model by Cappiello et al. (2006) are used in the analysis. The empirical results do not support the assumption of constant conditional correlation and there was clear evidence of time varying correlations between the Russian stocks and bond market and both asset markets exhibit positive asymmetries. The implications of the results in this dissertation are useful for both companies and international investors who are interested in investing in Russia. Our results give useful insights to those involved in minimising or managing financial risk exposures, such as, portfolio managers, international investors, risk analysts and financial researchers. When portfolio managers aim to optimize the risk-return relationship, the results indicate that at least in the case of Russia, one should account for the local market as well as currency risk when calculating the key inputs for the optimization. In addition, the pricing of exchange rate risk implies that exchange rate exposure is partly non-diversifiable and investors are compensated for bearing the risk. Likewise, international transmission of stock market volatility can profoundly influence corporate capital budgeting decisions, investors’ investment decisions, and other business cycle variables. Finally, the weak integration of the Russian market and low correlations between Russian stock and bond market offers good opportunities to the international investors to diversify their portfolios.

Debt financing rollercoaster: Latin American and Caribbean access to international bond markets since the debt crisis, 1982-2012

Includes bibliography

Bond markets for Latin American debt in the 1990s

Includes bibliography

Volatility transmission between stock and bond markets

A two-factor no-arbitrage model is used to provide a theoretical link between stock and bond market volatility. While this model suggests that short-term interest rate volatility may, at least in part, drive both stock and bond market volatility, the empirical evidence suggests that past bond market volatility affects both markets and feeds back into short-term yield volatility. The empirical modelling goes on to examine the (time-varying) correlation structure between volatility in the stock and bond markets and finds that the sign of this correlation has reversed over the last 20 years. This has important implications far portfolio selection in financial markets. © 2005 Elsevier B.V. All rights reserved.

Financing green development: 'Climate Bonds’ as a solution for institutional investors engagement

A Work Project, presented as part of the requirements for the Award of a Masters Degree in Management from the NOVA – School of Business and Economics

Long-run performance of sovereign rating changes

This paper examines the impact of Sovereign rating changes on the aggregate stock and bond market returns both in emerging and developed countries. Rating downgrades in emerging markets are associated with significant negative wealth effects both in the stock and bond markets. Moreover, the effects of rating downgrades persist up to six-months after the event. In contrast, upgrades in emerging markets convey no information. Rating changes in developed markets have no significant impact on either stock and bond market returns. Rating agencies act pro-cyclically, downgrading countries in bad times and, consequently, contributing to the instability in emerging markets.

Aid and Development: Issues and Reflections

The paper has three main sections. The first is a review of two particular propositions which appear in Dambisa Moyo’s 2009 book Dead Aid which were not subjected to rigorous analysis in the reviews which appeared following its publication. The finding is that neither proposition survives serious scrutiny – that aid is responsible for most of sub-Saharan Africa’s economic woes and that the international bond market represents a viable alternative to foreign aid for the finance of development-oriented investment. The second questions some of the characteristics and uses of the World Bank’s Country Policy and Institutional Assessment (CPIA), particularly focussing on the use of an essentially ordinal measure in cardinal applications. The third subjects the UK Department for International Development’s Needs-Effectiveness Index to critical review, concluding that further consideration of its attributes is necessary.

Policy initiatives and firms’ access to external finance: Evidence from a panel of emerging Asian economies

This paper analyses the impact of policy initiatives co-ordinated by Asian national governments on firms' access to external finance, using a unique firm-level database of eight Asian countries- Hong Kong SAR, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand over the period of 1996-2012. Using a difference-indifferences approach and controlling for firm-level and macroeconomic factors, the results show a significant impact of policy on firms' access to external finance. After splitting firms into constrained and unconstrained, using several criteria, the results document that unconstrained firms benefited significantly in obtaining external finance, compared to their constrained counterparts. Finally, we show that the increase in access to external finance after the policy initiative helped firms to raise their investment spending, especially for unconstrained firms.