Joseph P. Ogden

The End of the Month as a Preferred Habitat: A Test of Operational Efficiency in the Money Market

This paper argues that an aggregate preferred habitat for investors exists on (or about) the last day of the calendar month, due to standardizations in the nations payments system resulting in a concentrated flow of funds on this date. Thus, equilibrium yield discounts are predicted for securities maturing on such dates. Empirical tests on monthly and daily Treasury bill data support the principal hypothesis, as well as several ancillary hypotheses. The results have implications for Treasury debt management, for the short-term cash and debt management practices of businesses and banks, and for the empirical estimation of daily, weekly, or monthly return premiums on risky securities.

A corporate bond innovation of the 90s: The clawback provision in high-yield debt

Abstract This paper examines a recent financial innovation in corporate bond contracts, referred to as the clawback provision. A clawback provision in debt contracts gives the issuer an option to redeem a specified fraction of the bond issue within a specified period at a predetermined price and with funds that must come from a subsequent equity offering. We argue that issuers use clawback provisions to mitigate the wealth losses that would otherwise occur when new equity is offered. Consistent with the hypotheses, the evidence shows that bond offerings are more likely to include a clawback provision if their issuers are private, have more intangible assets, have fewer liquid assets, and are unregulated. We also estimate the price of clawback provisions and find that yield spreads on bonds with clawback provisions are a median of 86 basis points higher relative to what they otherwise would be.

The calendar structure of risk and expected returns on stocks and bonds

Abstract This paper documents, for 1947–2000, seasonalities in economic activity, stock and bond returns, and relationships among them. Evidence is consistent with an annual cycle view of economic activity and risk conditions. The power of lagged stock returns to forecast economic activity is greater for quarters ending in December and March. Mean excess returns on NYSE stocks in October through March account for 78–107% of their annual means and reflect a seasonal asymmetric return reversal tendency, which in turn explains low long-horizon variance ratios. Both market losses in April through September and subsequent returns in October through March are related, but with opposing signs, to October through March economic activity. The forecasting power of five variables is greatest for October through March. Tests of an asset-pricing model indicate that expected returns vary both cross-sectionally and over time. Implications for the debate between efficient markets and behavioral finance are discussed.

The Detection and Dynamics of Financial Distress

Using samples of US firms, we examine the efficacy of six risk-proxy variables to forecast 5-year failure: year-end t-values of stock return volatility, firm size, recent profitability, market leverage (LEV), book-to-market equity ratio (BM), and recent stock return. Logistic regression results indicate that firm size is most powerful, while LEV and BM are weakest. We then identify distressed firms and analyze the effect of year t+1 operating and financing cash flows on 5-year failure rates for these firms using a new methodology, failure risk surprise. Results explain why LEV and BM are weak forecasters of 5-year failure rates: Low-LEV and low-BM (high-LEV and high-BM) distressed firms are less (more) likely to have a profit in year t+1, and are also more likely to issue equity (retire debt) in year t+1, interactions which tend to moderate failure risk. We also find that failure risk sensitivity to year t+1 operating result increases with both LEV and BM, while failure risk sensitivity to future macroeconomic conditions is significant only for high-LEV firms. Many results are consistent with the tradeoff theory of capital structure, while other results indicate that managers make financing decisions to take advantage of mispricing.

Empirical Analyses of Three Explanations for the Positive Autocorrelation of Short-Horizon Stock Index Returns

This paper provides empirical analyses of three explanations for the observed positive autocorrelation of short-horizon stock index returns, using NYSE/AMEX and NASDAQ data. Results indicate that index autocorrelation cannot be substantially explained by either autocorrelated, time-varying expected returns, or nonsynchronous trading. The third explanation for index autocorrelation, the nonsynchronous information transfer hypothesis, states that stocks incorporate market-wide information on a nonsynchronous basis due to information and transaction costs. Evidence from analyses of mean returns on various portfolios following large returns on the S 500 futures contract, as well as regressions of portfolio returns on current and lagged futures returns, support this explanation. Small (large) firms collectively require approximately 7 (1-2) weeks to fully incorporate new market information on average, and this delayed impoundment accounts for the bulk of the observed autocorrelation.

The Relative Valuation of American Currency Spot and Futures Options: Theory and Empirical Tests

This study empirically tests contingent claims pricing models for American currency spot and futures options. Numerical analysis indicates that the difference in the model prices of spot and futures put (call) options (with the same exercise price and maturity) is, for a premium (discount) currency, positive and an increasing function of (a) the absolute difference in the prices of the underlying spot and futures contracts and (b) the maturity of the options. Tests on British pound, Deutsche mark, and Swiss franc options indicate many violations of the ordinal pricing relationships noted above. Additional tests indicate that option prices are inconsistent with functional relationship (b) above. Most of the observed violations are sufficiently large to provide arbitrage profits net of transaction costs, assuming interest rates are constant and the Interest Rate Parity theorem holds continuously. Alternatively, both the violations and the inconsistent functional relationship may be due to violation of the assumption of constant interest rates.

Market imperfections and the choices of maturity and call provisions in corporate debt

Abstract This study is an analysis of three market imperfections associated with corporate debt (transaction costs, agency costs, and information asymmetry) and how they may combine to affect a bond issuers choices of debt maturity and call provisions. Several hypotheses emerging from this analysis are then tested empirically. Empirical results generally support hypotheses regarding optimal maturity and optimal call provisions. However, while market imperfections appear to influence debt maturities, they do so in a more complex manner than has been modeled so far in the literature.

Did the Profitability of Momentum and Reversal Strategies Decline with Arbitrage Costs After the Turn of the Millennium

This article investigates the issue of whether major developments in U.S. stock markets around the turn of the millennium reduced arbitrage costs, and consequently the profitability of momentum, long-term reversal, and short-term reversal strategies. Evidence for the years 1990 to 2013 is generally consistent with these predictions, though effects of the financial crisis of 2008 to 2009 are also evident.

Corporate Retail Notes: A Good Alternative for Individual Investors?

This article initially describes the market for corporate retail notes (RNs)—debt securities issued directly to individuals (“retail” investors) through brokers, in small denominations (

A New Estimate of Transaction Costs

1,000) and generally on a weekly basis. RNs became popular in the 2000s, although only a few well-known industrial and financial firms issue them. The authors then examine a sample of 1,775 new RNs issued by industrial firms from 2005–2009. Nearly all have an investment-grade credit rating. All RNs include a “death put” provision, and most are callable at par value. After comparing yields on new RNs with seasoned corporate-bond benchmarks, however, the authors find no evidence that investors are compensated for the value (to the issuer) of the call provision. On average, RNs underperform benchmarks at all investment horizons up to two years, and performance is worse for callable RNs, the majority of which are called soon after deferment-period expiration. It is unlikely that these results can be explained by higher secondary-market liquidity. By purchasing new RNs, however, individual investors can avoid transaction costs on mainstream corporate bonds. In addition, individual investors may place a high personal value on the death put provision.