Ali Nejadmalayeri

Macroeconomic news and risk factor innovations

Purpose - The purpose of this paper is to determine if macroeconomic announcements affect the Fama-French market, size, book-to-market risk factors and momentum factor. Design/methodology/approach - Using unexpected announcements of major macroeconomic indicators, a study is made of how daily innovations of risk factors react to macroeconomic shocks. In a Flannery and Protopapadakis framework, the impact of macroeconomics surprises on the levels and volatilities of the risk factors is measured. A VAR model is employed as a robustness check. To better understand the mechanism of announcement impacts on risk factors, the relationship between the macroeconomics announcements and Fama-French size/book-to-market portfolio returns is investigated. Findings - Inflation, employment, consumption and business activities were found to affect levels and volatilities of risk factors. However, these macro variables affect risk factors differently. Inflation and non-farm payrolls decrease the market risk premium while increasing the size premium. Personal income increases the size premium while reducing the book-to-market premium. Industrial production and GDP only influence the level of the momentum factor. In this model specification, producer inflation (PPI) and personal income increase the volatility of the size premium while business inventories increase the volatility of the market premium. Originality - This papers results support the notion that different risk factors capture different economic fundamentals.

Sarbanes-Oxley Act and Corporate Credit Spreads

Stock market reaction suggests that despite improved disclosure and increased accountability, Sarbanes-Oxley Act (SOX) is too costly and not beneficial. Noting that bondholders are likely to reap the many potential benefits of SOX without bearing the brunt of costs, we examine how SOX affected corporate credit spreads to better assess its benefits. SOX has led to a significant structural decline in spreads of at least 27 basis points. Riskier firms (low rating, long maturity, high leverage, and small size) and firms closely related to SOX major provisions (earning variability, managerial trading, and corporate governance) experience greater declines in spreads.

Impact of US Macroeconomic Surprises on Stock Market Returns in Developed Economies

Macroeconomic conditions are known to affect risks factors and thereby influence asset returns within a given economy. We explore this link in a global setting. Given the dominant role the U.S. economy plays in the global economic environment, U.S. Macro economic shocks are expected to affect asset returns in other countries. The impact should be more pronounced in the developed economies where the U.S. is a large trading and capital-flows partner. Our results shows that residual returns and conditional volatilities in major developed economies are significantly impacted by US macroeconomic surprises. We identify U.S. macro economic shocks that have spillover impact on global asset returns over and above those transmitted through equity market returns. While return levels are significantly influenced by productivity and retail sales surprises, return conditional volatilities are mainly influenced by inflation, personal income, industrial production, leading indicators, and gross domestic product surprises.

Do U.S. Macroeconomic Surprises Influence Equity Returns? An Exploratory Analysis of Developed Economies

Given the dominant role the U.S. economy plays in global trade, we explore how U.S. macroeconomic surprises affect stock markets in ten major developed economies as well as in China and India. We do not find strong enough evidence to conclude that US macro shocks materially and consistently influence equity returns and volatilities in the economies studied. Consistent with previous research, it appears that only in few markets are return levels materially influenced by macro surprises generated in the U.S. Also, only a small number of macro shocks seem to be of any consistent significance. For returns levels, inflation, productivity, consumer confidence, and retail sales seem to matter. At the same time, conditional volatilities appear to be influenced by inflation, retail sales, durable goods, industrial production, consumer confidence, gross domestic product, and trade balance surprises. Finally, our exploratory analysis indicates that the degree of bilateral trade connectedness may partially explain the extent to which macroeconomic surprises are transmitted across countries.

Do FOMC Actions Speak Loudly? Evidence from Corporate Bond Credit Spreads

We find that Federal Open Market Committee (FOMC) actions (especially rate cuts) narrowed corporate credit spreads during the pre-crisis period of 2002-2007. During the 2008 crisis period, we find that both conventional cuts and quantitative easing decreased spreads. But FOMC inactions caused significant widening of spreads. The effects are especially large for speculative-grade and short-maturity bonds. Overall, the policy uncertainty during the crisis and macroeconomic theories during the pre-crisis period help to explain why FOMC announcements impacted credit spreads. The Fed’s actions targeted at promoting growth and/or providing systemic liquidity were especially noted by the corporate bond market.

Enduring Effects of Demography on Retirement Planning

Almost a century and half of evidence suggests that only individuals who start saving for retirement in the later stages of population busts and the early stages of population booms spend most of their retirement planning phase in bull stock markets with tame inflation, thus benefiting greatly from investing in stocks. Demography, particularly the proportional size of aggregate savers as measured by the Geanakoplos, Magill, and Quinzii (2004) MY ratio — the ratio of middle-age to young population — is the most pertinent determinant of intergenerational variations in retirement planning results. Unlucky generations, those who start saving during high MY ratio periods, are well advised to overweight corporate bonds in their portfolios. Moreover, when the retirement planning horizon is short, all generations should use caution in weighting stocks in their portfolios.

Equity Short Selling and the Cost of Debt

Extant evidence suggests short sales have pertinent information about firm fundamentals. If so, then information from short selling in liquid equity markets can be informative for infrequently traded corporate bonds. The adverse information conveyed by short interest should mean higher cost of debt. Using a large sample of corporate bonds, we examine whether lagged equity short interest affect credit spreads. Highly shorted firms do experience wider credit spreads in the subsequent months. Moreover, the increase in short interest leads to higher credit spreads. Short interest thus seems to contain adverse information about firm fundamentals that can prove useful to bond investors.

Performance Impact of Business Group Affiliation: An Analysis of Corporate Diversification Strategy

To understand the performance implications of corporate strategies as conditioned by business group affiliations, we analyze the relationship between corporate diversification and performance for 889 Indian firms. We find that diversified firms perform significantly worse than focused firms and that there exists a significant negative relationship between the degree of diversification and firm performance. A comparative analysis of firms affiliated with Indian business groups and those affiliated with MNCs indicates that sources of negative impact of diversification on performance are conditioned by the nature of a firms affiliation. For multinational affiliates, diversification appears to be associated with poor asset quality and asset management, which is an indicator of possible agency conflict. For domestic business group affiliates, diversification appears to generate cost inefficiencies leading to poor performance.