Ann Marie Hibbert

Credit Spread Changes and Equity Volatility: Evidence from Daily Data

We investigate the determinants of daily changes in credit spreads in the U.S. corporate bond market. Using a sample of liquid investment grade and high‐yield bonds, we show that both systematic bond and stock market factors as well as idiosyncratic equity market factors affect changes in the yield spread at the daily frequency. In particular, we find that increase in stock market volatility has a positive effect on changes in the spread of corporate bonds over the corresponding Treasuries beyond that captured by standard term structure variables. Our results show that there is an almost contemporaneous inverse relationship between changes in the bond yield spread and the stock return of the issuing firm.

Can Diversification be Learned

We investigate the role of financial education in household portfolio allocation decisions using data from a survey of 1,382 professors at universities across the United States. The results suggest that knowledge of diversification increases the likelihood that investors will efficiently allocate their investments across the major asset classes as well as invest in foreign assets. However, we find that investors with advanced knowledge of finance still tend to hold undiversified equity portfolios.

The Role of Financial Education in the Management of Retirement Savings

We investigate the role of financial education in the management of Defined Contribution retirement savings plans. We survey Finance and English professors from universities across the United States and compare the management of their savings in the TIAA-CREF® plans. We find that compared with English professors, Finance professors allocate a larger share of their retirement savings to equities, they manage their retirement portfolios more actively, and they are less likely to practice naïve diversification strategies.

Do Finance Professors Invest Like Everyone Else

Comparing the results of the Fed’s Survey of Consumer Finances with those of a survey of finance professors at U.S. universities, the authors found that finance professors are significantly more likely than others to invest in equities. They also found that finance professors are less prone to behavioral biases because their decision not to invest in equities is based on neither the outcome of their past investments nor their short-term expectations of the market. See comments and response on this article. Standard rational economic models predict that in the presence of a positive risk premium, all investors will hold some equity. However, there is evidence in the finance literature that a number of households in the United States hold no equity. Results from the Fed’s Survey of Consumer Finances (SCF) show that even within the top quintile of income distribution, a significant number of households do not invest in equities. In our study, we examined the investment pattern of finance professors to investigate whether they participate in the stock market to a greater extent than the general public. Finance theory suggests that in order to achieve optimal diversification, a portion of every portfolio should be invested in equities. Because finance professors are advocates of traditional finance theory on equity market participation, we would expect all finance professors to invest in equities. To test whether this group of experts practices what it preaches, we surveyed finance professors at universities across the United States. During the summer of 2007, using the University of Texas at Austin list of all regionally accredited universities, we manually collected the names and e-mail addresses of finance professors at these institutions. We used a questionnaire to collect data on actual portfolio holdings and demographics from each finance professor selected. We investigated whether finance professors, compared with households in the Fed’s 2007 SCF sample, are significantly more likely to invest in equities. Because our investigation focused on individuals who provided detailed information on their financial asset holdings, we included 4,160 respondents from the SCF sample and 1,368 respondents from the finance faculty sample. Unsurprisingly, we found that finance professors participate in the stock market to a greater extent than do members of the SCF sample. However, our counterintuitive finding is that a significant number of the finance professors do not participate in the stock market. Arguably, those finance professors who choose not to hold stocks are aware of the “rational” arguments for investing in stocks. Our findings thus raise the question of whether it is an oversimplification to suggest that not holding stocks is an investment “mistake.” Therefore, advising those less knowledgeable in finance always to hold stocks may not be beneficial. We also investigated whether some behavioral biases related to nonparticipation in the stock market are present in our sample of finance professors. Researchers have broadly characterized these biases as overconfidence and considering the past. An investor’s overconfidence in the future prospects of an investment can lead to an increased affinity for risk taking. With respect to the bias of considering the past, two alternative manifestations have been popularized: (1) Investors are willing to take on more risk after experiencing a gain because they believe they are using the house’s money, and (2) investors are willing to take on more risk after experiencing a loss because they are trying to recoup their prior losses (i.e., break even). We first examined whether finance professors are so confident in their own stock market predictions that they will invest in equities only if they expect a bull market in the short term. We then investigated whether our finance professors consider their past investment outcomes in deciding whether to hold equities and are thus prone to either the house-money effect or the break-even effect. Specifically, we tested whether members of this group decide whether to invest in equities on the basis of either their short-term market predictions or the outcomes of their past investments. We found no support for overconfidence (in predictions), the house-money effect, or the break-even effect. Taken together, these results suggest that our sample of finance professors is less prone to certain behavioral biases than the general public.

Credit Spreads and Regime Shifts

The authors use data on a large sample of investment-grade and high-yield corporate bonds of non-financial firms to investigate the stability of the relationship between yield spreads and both Treasury term structure and market risk variables. The sample spans before, during, and after the recent financial crisis. Regression model estimates reveal a negative relationship between credit spread changes and changes in the term structure variables, as well as a significant effect of stock market conditions, bond volatility, and aggregate liquidity on spreads. Results from a Markov switching-regime model confirm the presence of two regimes and show different effects of certain spread determinants undereach regime.

The Drivers of Sovereign CDS Spread Changes: Local Versus Global Factors

We use daily data for a panel of 34 countries to investigate regional differences in sovereign credit default swaps (CDS) spread determinants and the significance of local versus global market factors. Similar to prior studies, we find a high level of commonality among CDS spreads, but our results show that this effect is stronger in Latin American CDS. The results of our quantile panel regression model show that although global forces drive spreads across the conditional distribution, changes in credit ratings are significant in explaining CDS spreads only in the upper quantiles. We also confirm the existence of regional differences in spread determinants.

Expectations and Financial Markets: The Case of Brexit

This paper examines the impact of the public’s projected chance of Brexit, as reflected in betting odds, on European and U.S financial markets. We show that an increase in the likelihood of Brexit was associated with lower stock prices and higher market uncertainty. Brexit’s probability was also positively correlated with the value of gold and the Dollar Index and inversely related to yields on government bonds, GBP/USD, GBP/JPY and GBP/CHF. However, these results are only observed on days with high investor attention to the Brexit topic. This finding suggests that investor attention significantly influences the link between the market’s expectations of political events and asset prices or implied volatilities.

Accounting Irregularities and Failure to Deliver: An Examination of the Relationship between Naked Short Sales and Restatements

Purpose - – The purpose of this paper is to examine the relationship between naked short selling and accounting irregularities that cause a firm to issue a restatement. Design/methodology/approach - – Using the level of abnormal fails-to-deliver as a proxy for naked short selling, the paper looks for evidence of increased naked short selling in anticipation of, as well as in response to these announcements. Findings - – Larger firms and firms with a higher percentage of institutional ownership experience greater levels of fails prior to the announcement day, while smaller firms are more likely to be targets of naked short sellers after the announcement. The paper also finds that more transparent announcements are associated with more abnormal fails. Originality/value - – This paper is the first research to study the relation between naked short selling and accounting restatements.