New Economics Papers
on Financial Markets
Issue of 2007‒08‒27
five papers chosen by

  1. Is the corporate bond market forward looking? By Jens Hilscher
  2. Random Walk Expectations and the Forward Discount Puzzle By Philippe BACCHETTA; Eric VAN WINCOOP
  3. Assets Returns Volatility and Investment Horizon: The French Case By BEC, Frédérique; GOLLIER, Christian
  4. Price Discovery in Canadian and U.S. 10-Year Government Bond Markets By Bryan Campbell; Scott Hendry
  5. Cyclical Behavior of Debt and Equity Using a Panel of Canadian Firms By Francis Covas; Wouter J. Den Haan

  1. By: Jens Hilscher (International Business School, Brandeis University, 415 South Street, Waltham MA 02453, USA.)
    Abstract: This paper presents empirical evidence that the corporate bond market is forward looking with respect to volatility. I use the Merton (1974) model to calculate a measure of implied volatility from corporate bond yield spreads. I find that corporate bond transaction prices contain substantial information about future volatility - When predicting future volatility in a regression model, implied volatility comes in significantly and increases the R(square) when added to historical volatility. Consistent with this finding, single stock option implied volatility helps explain the variation in bond yield spreads when included together with historical volatility. JEL Classification: G12, G13.
    Keywords: Corporate bond spreads, Merton model, Implied volatility, Equity volatility, Bond pricing.
    Date: 2007–08
  2. By: Philippe BACCHETTA; Eric VAN WINCOOP
    Abstract: Two well-known, but seemingly contradictory, features of exchange rates are that they are close to a random walk while at the same time exchange rate changes are predictable by interest rate differentials. In this paper we investigate whether these two features of the data may in fact be related. In particular, we ask whether the predictability of exchange rates by interest differentials naturally results when participants in the FX market adopt random walk expectations. We find that random walk expectations can explain the forward premium puzzle, but only if FX portfolio positions are revised infrequently. In contrast, with frequent portfolio adjustment and random walk expectations, we find that high interest rate currencies depreciate much more than what UIP would predict.
    Keywords: excess returns; incomplete information; predictability
    JEL: E4 F3 G1
    Date: 2007–01
  3. By: BEC, Frédérique; GOLLIER, Christian
    JEL: G11
    Date: 2007–07–16
  4. By: Bryan Campbell; Scott Hendry
    Abstract: This paper presents some new results on the price discovery process in both the Canadian and U.S. 10-year Government bond markets using high-frequency data not previously analyzed. Using techniques introduced by Hasbrouck (1995) and Gonzalo-Granger (1995), we look at the relative information content of cash and futures prices in the market for Canadian Government bonds using futures market data from the Montreal Exchange and OTC cash market data reflecting the inter-dealer market covered by CanPx. We also analyze similar data from the US market over a somewhat longer period using data on the Chicago Board of Trade (CBOT) futures market as well as the cash market from GovPx in the first part of the sample and subsequently from BrokerTec. In general, we find that relatively more price discovery occurs in the futures markets than the cash markets in both Canada and the U.S. and that the results look remarkably similar across the two countries despite the large differences in the sizes of their markets and in their characteristics, particularly on the cash side. These overall results, however, hide the fact that information shares for the U.S. futures markets declined throughout 2004-05 apparently as a result of improvements in the spot market BrokerTec platform. Day-to-day variation in price discovery information shares is related to bid-ask spreads, trading volumes, and realized volatility in the markets but there remains much unexplained.
    Keywords: Financial markets; Market structure and pricing
    JEL: G12 G13 G14
    Date: 2007
  5. By: Francis Covas; Wouter J. Den Haan
    Abstract: We document the cyclical behavior of debt, equity, and retained earnings for different firm categories using firm-level Canadian data. There is evidence of both procyclical equity and debt issuance for all firm categories but the timing differs. In particular, there is strong evidence that equity issuance increases in anticipation of an expansion. During this phase, some substitution between debt and equity takes place. After the expansion has reached its peak, equity issuance starts to decrease and during this phase there is strong evidence of procyclical debt issuance and some substitution out of equity seems to take place. Retained earnings is procyclical except for small firms.
    Keywords: Business fluctuations and cycles
    JEL: E32 G32
    Date: 2007

General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.