Issuer Quality and Corporate Bond Returns Greenwood, Robin; Hanson, Samuel G.
Review of financial studies/The Review of financial studies,
06/2013, Letnik:
26, Številka:
6
Journal Article
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We show that the credit quality of corporate debt issuers deteriorates during credit booms and that this deterioration forecasts low excess returns to corporate bondholders. The key insight is that ...changes in the pricing of credit risk disproportionately affect the financing costs faced by low-quality firms, so debt issuance of low-quality firms is particularly useful for forecasting bond returns. We show that a significant decline in issuer quality is a more reliable signal of credit market overheating than rapid aggregate credit growth. We use these findings to investigate the forces driving time variation in expected corporate bond returns.
WAVES IN SHIP PRICES AND INVESTMENT Greenwood, Robin; Hanson, Samuel G.
The Quarterly journal of economics,
02/2015, Letnik:
130, Številka:
1
Journal Article
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We study the link between investment boom and bust cycles and returns on capital in the dry bulk shipping industry. We show that high current ship earnings are associated with high used ship prices ...and heightened industry investment in new ships, but forecast low future returns. We propose and estimate a behavioral model of industry cycles that can account for the evidence. In our model, firms overextrapolate exogenous demand shocks and partially neglect the endogenous investment response of their competitors. As a result, firms overpay for ships and overinvest in booms and are disappointed by the subsequent low returns. Formal estimation of the model suggests that modest expectational errors can result in dramatic excess volatility in prices and investment.
Changes in monetary policy have surprisingly strong effects on forward real rates in the distant future. A 100 basis point increase in the two-year nominal yield on a Federal Open Markets Committee ...announcement day is associated with a 42 basis point increase in the ten-year forward real rate. This finding is at odds with standard macro-models based on sticky nominal prices, which imply that monetary policy cannot move real rates over a horizon longer than that over which all prices in the economy can readjust. Instead, the responsiveness of long-term real rates to monetary shocks appears to reflect changes in term premia. One mechanism that could generate such variation in term premia is based on demand effects due to the existence of what we call yield-oriented investors. We find some evidence supportive of this channel.
Many observers have argued that the regulatory framework in place prior to the global financial crisis was deficient because it was largely “microprudential” in nature. A microprudential approach is ...one in which regulation is partial equilibrium in its conception and aimed at preventing the costly failure of individual financial institutions. By contrast, a “macroprudential” approach recognizes the importance of general equilibrium effects, and seeks to safeguard the financial system as a whole. In the aftermath of the crisis, there seems to be agreement among both academics and policymakers that financial regulation needs to move in a macroprudential direction. In this paper, we offer a detailed vision for how a macroprudential regime might be designed. Our prescriptions follow from a specific theory of how modern financial crises unfold and why both an unregulated financial system, as well as one based on capital rules that only apply to traditional banks, is likely to be fragile. We begin by identifying the key market failures at work: why individual financial firms, acting in their own interests, deviate from what a social planner would have them do. Next, we discuss a number of concrete steps to remedy these market failures. We conclude the paper by comparing our proposals to recent regulatory reforms in the United States and to proposed global banking reforms.
We study optimal government debt maturity in a model where investors derive monetary services from holding riskless short-term securities. In a setting where the government is the only issuer of such ...riskless paper, it trades off the monetary premium associated with short-term debt against the refinancing risk implied by the need to roll over its debt more often. We extend the model to allow private financial intermediaries to compete with the government in the provision of short-term money-like claims. We argue that, if there are negative externalities associated with private money creation, the government should tilt its issuance more toward short maturities, thereby partially crowding out the private sector's use of short-term debt.
Predictable Financial Crises GREENWOOD, ROBIN; HANSON, SAMUEL G.; SHLEIFER, ANDREI ...
The Journal of finance (New York),
April 2022, Letnik:
77, Številka:
2
Journal Article
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ABSTRACT
Using historical data on postwar financial crises around the world, we show that the combination of rapid credit and asset price growth over the prior three years, whether in the ...nonfinancial business or the household sector, is associated with a 40% probability of entering a financial crisis within the next three years. This compares with a roughly 7% probability in normal times, when neither credit nor asset price growth is elevated. Our evidence challenges the view that financial crises are unpredictable “bolts from the sky” and supports the Kindleberger‐Minsky view that crises are the byproduct of predictable, boom‐bust credit cycles. This predictability favors policies that lean against incipient credit‐market booms.
We develop and test a model in which swap spreads are determined by end users' demand for and constrained intermediaries' supply of long-term interest rate swaps. Swap spreads reflect compensation ...both for using scarce intermediary capital and for bearing convergence risk—i.e., the risk spreads will widen due to a future demand-and-supply imbalance. We show that a proxy for the intermediated quantity of swaps—dealers' net position in Treasuries—flipped sign during the Global Financial Crisis when swap spreads turned negative and that this variable predicts the excess returns on swap spread trades. Exploiting our model's sign restrictions, we identify shifts in demand and supply and find that both contribute significantly to the volatility of swap spreads.
Banks as patient fixed-income investors Hanson, Samuel G.; Shleifer, Andrei; Stein, Jeremy C. ...
Journal of financial economics,
09/2015, Letnik:
117, Številka:
3
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We examine the business model of traditional commercial banks when they compete with shadow banks. While both types of intermediaries create safe “money-like” claims, they go about this in different ...ways. Traditional banks create money-like claims by holding illiquid fixed-income assets to maturity, and they rely on deposit insurance and costly equity capital to support this strategy. This strategy allows bank depositors to remain “sleepy”: they do not have to pay attention to transient fluctuations in the market value of bank assets. In contrast, shadow banks create money-like claims by giving their investors an early exit option requiring the rapid liquidation of assets. Thus, traditional banks have a stable source of funding, while shadow banks are subject to runs and fire-sale losses. In equilibrium, traditional banks have a comparative advantage at holding fixed-income assets that have only modest fundamental risk but are illiquid and have substantial transitory price volatility, whereas shadow banks tend to hold relatively liquid assets.
Asset Price Dynamics in Partially Segmented Markets Greenwood, Robin; Hanson, Samuel G.; Liao, Gordon Y.
Review of financial studies/The Review of financial studies,
09/2018, Letnik:
31, Številka:
9
Journal Article
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We develop a model in which capital moves quickly within an asset class but slowly between asset classes. While most investors specialize in a single asset class, a handful of generalists gradually ...reallocate capital across markets. Upon the arrival of a large supply shock, prices of risk in the directly affected asset class become disconnected from those in others. Over the long run, capital flows cause prices of risk to become more closely aligned. While prices in the directly affected market initially overreact, prices in related markets may underreact. We use the model to reassess event-study evidence on quantitative easing.
Mortgage convexity Hanson, Samuel G.
Journal of financial economics,
08/2014, Letnik:
113, Številka:
2
Journal Article
Recenzirano
Most home mortgages in the United States are fixed-rate loans with an embedded prepayment option. When long-term rates decline, the effective duration of mortgage-backed securities (MBS) falls due to ...heightened refinancing expectations. I show that these changes in MBS duration function as large-scale shocks to the quantity of interest rate risk that must be borne by professional bond investors. I develop a simple model in which the risk tolerance of bond investors is limited in the short run, so these fluctuations in MBS duration generate significant variation in bond risk premia. Specifically, bond risk premia are high when aggregate MBS duration is high. The model offers an explanation for why long-term rates could appear to be excessively sensitive to movements in short rates and explains how changes in MBS duration act as a positive-feedback mechanism that amplifies interest rate volatility. I find strong support for these predictions in the time series of US government bond returns.
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