When the riskiness of an asset increases, then, arguably, some risk-averse agents that were previously willing to hold on to the asset are no longer willing to do so. Aumann and Serrano (2008) have recently proposed an index of riskiness that helps to make this intuition rigorous. We use their index to analyze the riskiness of corporate bonds and how this can change over time and across rating classes and how it compares to the riskiness of other financial instruments. We find statistically significant evidence that a number of financial and macroeconomic variables can predict time-variation in the riskiness of corporate bonds, including in ways one might not expect. For example, a higher yield-to-maturity lowers riskiness by reducing the frequency and the magnitude of negative holding-period returns.

The Riskiness of Corporate Bonds

In this paper we investigate the return relations between major asset classes using data from both the US and the UK. Our first objective is to examine time variation in conditional correlations to determine when these variables act as a hedge against each other. Secondly, we provide evidence on whether the dependencies between the asset classes differ during extreme price movements by using quantile regressions. This analysis provides evidence on whether these asset classes can be considered as safe havens for each other. A noteworthy finding of our study is that gold can be regarded as a safe haven against exchange rates in both countries, highlighting its monetary asset role

Hedges and Safe Havens - An examination of Stocks, Bonds, Oil, Gold and the Dollar

We use an index of riskiness recently proposed by Aumann and Serrano (2008) to analyze how the riskiness of diversified portfolios of corporate bonds changes across rating classes and through time and how it compares to the riskiness of other financial instruments. We find that differences in riskiness among portfolios of bonds belonging to different rating classes are seldom statistically significant. We instead find significant time variation in riskiness, driven mainly by return volatility, inflation, and average bond yields. In particular, we find that increases in average bond yields have historically tended to reduce the riskiness of portfolios of corporate bonds by increasing their expected return and by lowering the probability of portfolio losses.

This paper proposes a latent factor approach based on a state–space framework in order to identify which factor, if any, dominates price fluctuations in the Chinese stock markets. We also illustrate the connection of such stock price decomposition with several general equilibrium asset pricing models and show that the decomposition results can potentially offer useful insights with regard to the empirical relevance of asset pricing models. We use quarterly data of the Chinese A-Share equity market over the period 1995Q3–2011Q1 and find that the estimates of the state–space model suggest that the expected return is the primary driving force behind price fluctuations in the Chinese stock market. We show that the time-varying expected returns appear to be counter-cyclical and this result seems to be consistent with the habit formation model of Campbell and Cochrane [1999. By force of habit: A consumption-based explanation of aggregate stock market behavior. Journal of Political Economy 107, no. 2: 205–51.]. ...

Sources of the stock price fluctuations in Chinese equity market

This paper investigates the effect of monetary policy shifts on Treasuries over the last three decades. Using Campbell and Ammer’s (1993) framework, we decompose unexpected excess returns on 2-, 5- and 10-year Treasuries in three components related to revisions in expectations (news) about future excess returns, inflation and real interest rates. We evaluate the impact of conventional and unconventional monetary policy shocks on returns and their components. Our results indicate that expansionary monetary policy shocks are associated with declining inflation expectations and higher Treasuries’ returns.

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Treasuries variance decomposition and the impact of monetary policy

This paper decomposes US and Euro area excess stock and bond return innovations into news factors using the Campbell–Schiller methodology. The results indicate that stock return volatility is mostly due to volatility of future excess return news. Inflation news plays a minor role although it is significantly correlated with excess return innovations. For the bond market too, it is future return news—not inflation news—that moves bond returns most. For finite investment horizons, however, asset market movements give a differential importance to the various news components. Results are comparable for the US and the Euro area, but differ in terms of magnitudes. In addition, sensitivities (‘betas’) to a set of state variables are estimated, yielding high interest rate betas and low money growth betas. Generally, inflation, unemployment and leading indicator betas are significant. Asset market exposures to oil and exchange rate changes are more significant for the Euro area than in the US.

Nico Valckx

Papers

The decomposition of US and Euro area stock and bond returns and their sensitivity to economic state variables