Ivelina Pavlova

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.

Long memory in REIT volatility and changes in the unconditional mean: a modified FIGARCH approach

We examine the long memory of real estate investment trust (REIT) volatility in the mature REIT markets of Australia, Japan, the UK and the US, and propose a modified fractionally integrated (FIGARCH) model for forecasting at daily and weekly frequencies. Long memory of volatility occurs when the effects of volatility shocks persist over extended periods of time. Our results suggest that the appearance of long memory in REIT return series is due to a lack of adjustment for temporal changes in the unconditional mean of volatility. Based on our long memory results, we empirically test a modified FIGARCH model and show that it performs better at weekly and daily forecast horizons. Forecasting REIT series volatility has important implications for risk evaluation, portfolio optimisation and derivatives pricing.

Dynamic interdependence of sovereign credit default swaps in BRICS and MIST countries

ABSTRACT This article examines the interactions of emerging markets sovereign credit default swaps (CDS). Using a generalized vector autoregressive framework and principal component analysis, we find significant spillover effects within the two groups of emerging markets under study. Using the principal component analysis, we show that global financial market factors are important drivers of BRICS and MIST sovereign CDS spreads variability. Focusing on the forecast error variance decomposition, most of the spillover effects are documented among the emerging markets CDS. Brazil and Mexico contribute the largest net directional spillovers to the other emerging markets studied. Highlights: There exist significant CDS spillover effects for MIST and BRICS countries. Mexico dominates the spillover effects within the MIST group while Brazil dominates the spillover effects within the BRICS group. As determined by principal component analysis, global financial market factors are important drivers of BRICS and MIST sovereign CDS spreads variability. There exists a relatively small net directional spillover from global financial market factors to the countries under study; however, the total spillover is time-varying. A large proportion of the forecast error variance in the markets studied comes from spillovers.

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.

In search of momentum profits: are they illusory?

We test whether a Genetic Algorithm (GA) can find profitable investment strategies based on prior stock returns and earnings surprises. We add to the argument whether momentum investing profits are a statistical illusion. The performance of the optimized momentum portfolios is evaluated before and after trading costs, during different time periods, over two market states, and after adjusting for risk. The GA optimization improves the annual returns of the momentum strategies by 2% to 6%. After considering transaction costs, both price and earnings momentum portfolios do not appear to generate abnormal returns. Positive risk-adjusted returns net of trading costs are documented solely in the ‘up’ markets for a portfolio long in prior winners only.

The boom and the lean times in global REITs: the 2000‐2008 period

Purpose – The purpose of this paper is to consider two global real estate periods (2000‐2006 and 2007‐2008) that will probably be recorded in history as the most significant periods in terms of a surge and then an eventual downturn in the real estate prices and returns. The paper aims to offer investment strategies in the real estate sector and pinpoint the optimum momentum strategies that provide the maximum returns in the real estate investment trusts (REITs) markets of seven countries.Design/methodology/approach – Within an iterative framework, a two‐step procedure was employed. The first step drew upon an established momentum approach. The second step, however, departed from it and employed an evolutionary (genetic) algorithm to optimize the investment strategies that could be pursued.Findings – The findings suggest that momentum effects have been present during the 2000‐2008 periods. However, in contrast with prior studies, momentum portfolio returns are statistically insignificant during the boom ye...

Equities and Commodities Comovements: Evidence from Emerging Markets

Abstract The financialization of commodities and their inclusion in financial portfolios as part of an investment strategy may result in higher correlations and volatility spillovers between commodity and equity markets. In this paper, we estimate the correlation between equity markets and commodities using the dynamic conditional correlation (DCC) model, while emphasizing the differences between emerging and developed markets co-movements with commodities. The results reveal that certain emerging markets, especially those in Asia, show a much lower level of co-movement with commodities than developed markets do, while Latin American equities exhibit a higher level of integration with commodities. Furthermore, it is found that both agricultural and precious metals commodities offer better diversification possibilities in the less developed markets. We also find that increases in the CBOE Volatility Index (VIX) are related to higher agriculture commodities-equities correlations, while commodity net index investment has limited explanatory power in our study.

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.

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.