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In any canonical Gaussian dynamic term structure model (GDTSM), the conditional forecasts of the pricing factors are invariant to the imposition of no-arbitrage restrictions. This invariance is maintained even in the presence of a variety of restrictions on the factor structure of bond yields. To establish these results, we develop a novel canonical GDTSM in which the pricing factors are observable portfolios of yields. For our normalization, standard maximum likelihood algorithms converge to the global optimum almost instantaneously. We present empirical estimates and out-of-sample forecasts for several GDTSMs using data on U.S. Treasury bond yields. [ABSTRACT FROM PUBLISHER]

We provide a comprehensive empirical analysis of the effects of liquidity and information risks on expected returns of Treasury bonds. We focus on the systematic liquidity risk of Pastor and Stambaugh as opposed to the traditional microstructure-based measures of liquidity. Information risk is measured by the probability of information-based trading (PIN). We document a strong positive relation between expected Treasury returns and liquidity and information risks, controlling for the effects of other systematic risk factors and bond characteristics. This relation is robust to many empirical specifications and a wide variety of traditional liquidity and informed trading proxies. [ABSTRACT FROM AUTHOR]

We examine the yield curve behavior and the relative performance of affine term structure models (ATSMs) using government bond yield data from Canada, Germany, Japan, the U.K., and the U.S. We find strong predictability of forward rates for excess bond returns and reject the expectations hypothesis in all five countries. A three-factor model is sufficient to capture movements in the yield curve of Canada, Japan, the U.K., and the U.S., but may not be enough for Germany. An exhaustive comparison among ATSMs with no more than three factors reveals that the three-factor essential affine model (A1(3)E), with only one factor affecting the volatility of the short rate but with all three factors affecting the price of risk, performs best in all five countries. Simulations provide inconclusive evidence on whether this best affine model can successfully generate the rich yield curve behavior observed in the data. [ABSTRACT FROM AUTHOR]

We examine the wealth effects of mergers and acquisitions on target and acquiring firm bondholders in the 1980s and 1990s. Consistent with a coinsurance effect, below investment grade target bonds earn significantly positive announcement period returns. By contrast, acquiring firm bonds earn negative announcement period returns. Additionally, target bonds have significantly larger returns when the target's rating is below the acquirer's, when the combination is anticipated to decrease target risk or leverage, and when the target's maturity is shorter than the acquirer's. Finally, we find that target and acquirer announcement period bond returns are significantly larger in the 1990s. [ABSTRACT FROM AUTHOR]

This study develops an alternative way to measure default risk and suggests an appropriate method to assess the performance of fixed-income investors over the entire spectrum of credit-quality classes. The approach seeks to measure the expected mortality of bonds and the consequent loss rates in a manner similar to the way actuaries assess mortality of human beings. The results show that all bond ratings outperform riskless Treasuries over a ten-year horizon and that, despite relatively high mortality rates, B-rated and CCC-rated securities outperform all other rating categories for the first four years after issuance, with BB-rated securities outperforming all others thereafter. [ABSTRACT FROM AUTHOR]

Expectations theories of asset returns may be interpreted either as stating that risk premia are zero or that they are constant through time. Under the former interpretation, different versions of the expectations theory of the term structure are inconsistent with one another, but I show that this does not necessarily carry over to the constant risk premium interpretation of the theory. I present a general equilibrium example in which different types of risk premium are constant through time and dependent only on maturity. Furthermore, I argue that differences among expectations theories are second-order effects of bond yield variability. I develop an approximate linearized framework for analysis of the term structure in which these differences disappear, and I test its accuracy in practice using data from the CRSP government bond tapes. [ABSTRACT FROM AUTHOR]

The article examines the effect of callability on bond yields in the U.S. The author also focuses on the effects of default risk and relative security supplies on yield spreads. A model of the effect on yield spreads of callability is developed and compared to one estimated by Timothy Q. Cook and Patric H. Hendershott. Other factors affecting the yield spreads of U.S. corporations are discussed. The author concludes that the proxy for the effect of callability on yield spreads presented in the article is superior to the one developed by Cook and Hendershott.

This article examines seasonality in U.S. bond returns. This paper consists of five sections. In the first section, seasonality in capital market returns is explained. Section two describes the data used in this study and the problems encountered. Section three discusses the evaluation methods and empirical results. Section four analyzes the results. Section five presents a summary of the theoretical discussion, as well as the empirical analysis, and suggests areas for future research on this topic.

The article considers the pricing of premium bonds. The author seeks to determine the appropriate bond pricing equation for premium bonds under the assumption that taxpayers elect the amortization of the premium on a straight line basis as a deduction from regular taxable income. The author asserts that there are two parts of a bond pricing equation—one for discounts and par bonds and another for premium bonds. Additionally, the author discusses the coupon effect on yield to maturity and disproves Caks' method for deriving zero coupon discount rates from bond pairs.

The article discusses a new method of estimating liquidity effects in corporate bond yield spreads from an unbalanced group of securities. In this empirical study, liquidity effects and groups of assets sharing similar effects from transaction data of more than five thousand bonds traded in the U.S. were estimated.

The article discusses challenges in the 2016 corporate defined benefit (DB) pensions plans in the U.S. Topics include changes in accounting rules as to the funded approach of corporate DB plans in the 1980s, the growth of funding ratio (FR) and DB plan assets and liabilities proxies from 1995 - 2014 and the discount rate and long bond yield. Also cited are the risk tolerance of plan sponsors, the Pension Protection Act (PPA) and limited capabilities of liability-driven investment (LDI) assets.

We use a unique dataset of SEC Form N-SAR filings to examine the gross flows of U.S. bond funds. We find that gross inflows and outflows average around 4% of total net assets per month, but net flows average only 0.26%. When modeling these flows, we see that, as with equity funds, bond fund investors chase returns. Most of the return chasing is done by inflows. Funds with the highest decile of returns average 1% higher net flow and inflow per month, and the lowest-decile funds lose nearly 0.6% in assets per month. Next, we find that positive net flows cause bond funds to diversify their holdings regardless of fund size. Finally, we test whether flows predict returns and find that an inflow-weighted portfolio generates alphas of 0.8% per year. Bond inflows appear to be "smart money." [ABSTRACT FROM AUTHOR]

Pension funds typically suggest the 60-40 stock-bond rule to lower risk, as bonds tend to rise during stock market declines. However, U.S. investment returns have depended on the presidential party in power, and returns in the last two years of all administrations exceed those in the first two years. The strategies using small-cap stocks with Democrats and intermediate bonds or large-cap stocks with Republicans yields final wealth of about six times the large-cap index, 50% more than small caps and more than twenty times the 60-40 mix since 1942. [ABSTRACT FROM AUTHOR]

The article examines the ability of expense ratios and prior five-year returns to predict 1995-1999, 2000-2004, and 2005-2009 net returns on domestic taxable bond funds within the same Morningstar Inc. 3-by-3 fixed-income style box in the U.S. It notes that Morningstar measures a fund's credit risk based on its average credit rating. It further states that the expense ratios is forecasted a smaller returns for 2005-2009 period than in prior five-year periods.

This article investigates the dynamic linkages among four major sovereign bond yields (German, Japanese, U.K., and U.S.) for the 1990-2010 period. Using VAR. analysis and Engle's dynamic conditional correlation GARCH specification, the author examines the short- and long-run linkages between yield pairs and finds that yield correlations are time-varying and differ during economic expansions and contractions. Finally, the author assesses the impact of bond yield correlations on the other bond yields' dynamic correlations and report that the U.S. bond yield volatility affects the other yields' correlations differently. The results have significant implications for bond portfolio construction and monetary policymaking. [ABSTRACT FROM AUTHOR]

The empirical connection between the population age-structure and financial asset returns has been so far investigated with special focus on the US, whereby weak or disparate results are obtained. This paper aims to assess whether this connection is affected by the demographic dynamics. To this end the analysis is based on a stylized overlapping generation model and on the empirical investigation for Italy, which is experiencing one of the most pronounced ageing in the world and, specifically, steeper than the US one. Following the approach used for the US, stock returns and Government bond yields are regressed over demographic and/or control variables using annual data over 1958–2004. Results for Italy are more clear-cut and thus support the importance of the country-specific age-dynamics in explaining the impact of demographics on financial markets. [ABSTRACT FROM AUTHOR]

Uncovered Interest Rate Parity (UIP) states that bonds in different denomination should produce the same returns if the maturities of the bonds are the same. Given this, if a foreign bond produces a lower holding period return than a home bond of the same maturity, for their remaining lives the same foreign bond ought to produce a return higher than the home bond. A test is designed according to this relationship. With 1 to 6 year interest rate data of U.S., Britain and Germany from 1979 to 2005, our test shows that this relationship is more reliable for 6-year interest rates than the shorter rates in general. This result lends support to the long-run UIP. A trading strategy is developed by utilizing this idea. We show that positive returns can be achieved by the strategy for bonds of longer horizons. This result also serves as indirect evidence of the long-run UIP. [ABSTRACT FROM AUTHOR]

U.S. firms commonly use preferred stocks to raise external capital. Yet this hybrid security’s issuance costs and offer yields have not been previously examined in a systematic manner. We analyze a sample of 3,042 U.S. preferred stocks issued between 1980 and 1999. We find that convertible issues, which are riskier than straight issues, entail higher gross spreads and other direct expenses. Scale, credit rating, and industry effects influence gross spreads and issuance costs. We also compare preferred stocks yields with various bellwether bond yields. Our results support the tax–based argument that suggests that yields on preferred stocks should be lower than comparable risky bonds. [ABSTRACT FROM AUTHOR]

Describes a model of expected return on defaultable bonds in the U.S. Types of the default risk premium illustrated in reduced-form models; Similarity between default-free and defaultable bond pricing; Reduction of the issue of expected return to a standard calculation using estimated model parameters.

This paper investigates the association between population age structure, particularly the share of the population in the "prime saving years" (40 to 64), and the returns on stocks and bonds. The paper is motivated by recent claims that the aging of the "baby boom" cohort is a key factor in explaining the recent rise in asset values, and by predictions that asset prices will decline when this group reaches retirement age and begins to reduce its asset holdings. This paper begins by considering household age-asset accumulation profiles. Data from repeated cross sections of the Survey of Consumer Finances suggest that, whereas age-wealth profiles rise sharply when households are in their thirties and forties, they decline much more gradually when households are in their retirement years. When these data are used to generate "projected asset demands" based on the projected future age structure of the U.S. population, they do not show a sharp decline in asset demand between 2020 and 2050. The paper considers the historical relationship between demographic structure and real returns on Treasury bills, long-term government bonds, and corporate stock, using data from the United States, Canada, and the United Kingdom. Although theoretical models generally suggest that equilibrium returns on financial assets will vary in response to changes in population age structure, it is difficult to find robust evidence of such relationships in the time series data. This is partly due to the limited power of statistical tests based on the few "effective degrees of freedom" in the historical record of age structure and asset returns. These results suggest caution in projecting large future changes in asset values on the basis of shifting demographics. Although the projected asset demand does display some correlation with the price-dividend ratio on corporate stocks, this does not portend a sharp prospective decline in asset values, because the projected asset demand variable does not fall in future decades. [ABSTRACT FROM AUTHOR]

Previous studies show that January returns in high-yield bond (HYB) markets are usually large. While these results are ubiquitous, their validity depends on the robustness of statistical procedures used. Virtually every study of seasonal variation in HYB markets has used mean/variance analysis despite it being well documented that returns in HYB markets are nonnormally distributed. This study uses stochastic dominance comparisons to audit previous parametric tests of the January effect in HYB markets in the U.S. from 1926 to 1993. Results indicate that the January effect in HYB markets is robust and that previous findings are not an artifact deriving from violations of distributional assumptions. (C) 2001 Elsevier Science Inc. All rights reserved. [ABSTRACT FROM AUTHOR]

In this paper, we analyze the gains from international diversification of investment portfolios from the Japanese as well as the U.S. perspectives. The major findings of this paper include: First, the 'potential' gains from international, as opposed to purely domestic, diversification are much greater for U.S. investors than for Japanese investors. For U.S. investors, the gains accrue not so much in terms of lower risk as in terms of higher return, and the opposite holds for Japanese investors. Second, using various 'ex ante' international investment strategies designed to control parameter uncertainty, U.S. investors can realize substantial gains from international diversification in out-of-sample periods. Japanese investors, however, can gain relatively little. Third, hedging exchange risk generally allows the U.S., but not Japanese, investors to benefit more from international diversification. For U.S. investors, the international bond diversification with exchange risk hedging offers a superior risk-return trade-off than the international stock diversification, with or without hedging. [ABSTRACT FROM AUTHOR]

In his 1976 presidential address to the American Finance Association, Miller shows that the equilibrium marginal personal tax rate on riskless bond income is equal to the marginal corporate tax rate. In the presence of risk, he and, subsequently, others suggest that the theoretical equilibrium occurs when the personal tax rate is less than the corporate tax rate. This study investigates empirically these relationships by examining the yield ratio of non-taxable to taxable debt at various risk levels. Both the riskless and risk propositions are confirmed. [ABSTRACT FROM AUTHOR]

This article comments on a paper by John Y. Campbell and Robert J. Shiller about the introduction of indexed government bonds in the U.S. The authors believe that the three frequently mentioned objections to the issue of indexed bonds are exaggerated. First, the fear that protecting the public against inflation would reduce the political pressures to fight inflation would be outweighed by the sleeping policeman effect, policymakers would know that higher inflation would be penalized by higher nominal debt payments. Second, the markets would not balkanize meaning that the introduction of indexed bonds would not spoil the market for nominal bonds. Third, the problem of how to tax indexed bonds can be overcome by taxing only the nominal component of interest. On yield, the authors have difficulty establishing that the yield on indexed bonds will be below that on nominal bonds. In a general equilibrium context, the introduction of indexed bonds may make possible intergenerational risk sharing that could only imply a lower equilibrium rate of return than that on nominal bonds. It is necessary to consider two complications. First, the practical difficulties of whether there is anything special about a long-term inflation hedge.

The paper focuses on bond portfolio management in the United States. Bond portfolios are an effective diversifier to improve a long-term investor's risk/return ratios in mixed portfolios. Bond/stock portfolio returns are very insensitive to alternative portfolio strategies. Bond returns have been linear to portfolio risk for long-term portfolios which were annually rebalanced. It is widely believed that active bond management can raise returns in the 1950 and 1960. A subsequent simulation run, which bought twenty-year bonds only when twenty-year rates were over five percent, the interest rate timing was not as effective as expected. Bond portfolio strategy was initially specified as the generally superior buy-long-and-hold strategy.

This paper uses an equilibrium multifactor model to interpret the cross-sectional pattern of postwar U.S. stock and bond returns. Priced factors include the return on a stock index, revisions in forecasts of future stock returns (to capture intertemporal hedging effects), and revisions in forecasts of future labor income growth (proxies for the return on human capital). Aggregate stock market risk is the main factor determining excess returns; but in the presence of human capital or stock market mean reversion, the coefficient of relative risk aversion is much higher than the price of stock market risk. [ABSTRACT FROM AUTHOR]

This article presents a simulation model to forecast probability distribution of returns for common stocks, long- term U.S. government and corporate bonds, U.S. treasury bills and consumer goods. In an efficient capital market, the consensus forecast removes the opportunity to outguess the market by eliminating over and under pricing of assets. To the extent that the simulation model portrays the market, its forecast can be thought of as a benchmark against which to compare other forecasts. The results shows that the expected compounded return on common stocks for the period 1976-2000 is 13.0 percent per year. However, stocks are risky investments so that actual returns may differ substantially from the expected return. The nominal compounded annual returns from maintaining either a 20-year maturity government bond or a 20-year maturity corporate bond portfolio are expected to be 8.0 percent and 8.2 percent, respectively, from 1976 to 2000. Maintaining a long-term bond portfolio is less risky than holding stocks.