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Journal Article
What determines the credit spread?
Although the swings in economic measures during the last recession and recovery were fairly modest, swings in financial markets were quite large. Once financial markets found their footing, after steep losses in 2000-2002, prices on virtually all traded financial claims rose as the economic outlook improved. This pattern was particularly true in the corporate bond market. In this Economic Letter I describe the significant narrowing of bond spreads across different sectors and ratings classes since the last recession. I also discuss recent research on the determinants of relative pricing in ...
Journal Article
Evaluating the relative strength of the U.S. capital markets
Concern is growing that the U.S. capital markets are losing market share to overseas competitors. A decline in foreign initial public offerings indeed suggests that the U.S. equity market is becoming less attractive to certain issuers. However, evidence on the competitiveness of the U.S. equity market is mixed, since the trends affecting it are likewise shaping equity markets abroad. A less ambiguous decline in the share of global issuance can be seen in the U.S. corporate bond market, which is facing a growing challenge from the Eurobond market.
Journal Article
Economic factors, monetary policy and expected returns on stocks and bonds
This paper examines the impact of the stance of monetary policy on security returns. The two measures of the stance of monetary policy used, the federal funds rate and an index based on the changes in the discount rate, contain significant information that can be used to forecast expected stock and bond portfolio returns. Specifically, we find that a restrictive (expansive) monetary policy stance decreases (increases) returns of large and small stock portfolios and in some cases, corporate bond portfolios. The monetary policy stance measures have explanatory power in forecasting stock and ...
Report
Multiple ratings and credit standards: differences of opinion in the credit rating industry
This paper tests whether the tendency of third rating agencies to assign higher ratings than Moody's and Standard & Poor's results from more lenient standards or sample selection bias. More lenient standards might result from incentives to satisfy issuers who are, in fact, the purchasers of the ratings. Selection bias might be important because issuers that expect a low rating from a third agency are unlikely to request one. Our analysis of a broad sample of corporate bond ratings at year-end 1993 reveals that, although sample selection bias appears important, it explains less than half the ...
Conference Paper
The variation of default risk with Treasury yields
Journal Article
The high-yield debt market: 1980-1990
A review of the growth of the junk bond market, the trends that contributed to its expansion, and the impact of recent events on its viability.
Report
Multiple ratings and credit standards: differences of opinion in the credit rating industry
Rating-dependent financial regulators assume that the same letter ratings from different agencies imply the same levels of default risk. Most "third" agencies, however, assign significantly higher ratings on average than Moody's and Standard & Poor's. We show that, contrary to the claims of some rating industry professionals, sample selection bias can account for at most half of the observed average difference in ratings. We also investigate the economic rationale for using multiple rating agencies. Among the many variables considered, only size and bond-issuance history are consistently ...
Journal Article
Junk bonds: why now?
Journal Article
Low-grade bonds: a growing source of corporate funding