Madhu Kalimipalli

Bid-Ask Spread, Volatility, and Volume in the Corporate Bond Market

This article examines the time series relationship between the bid-ask spread and volatility and volume of the ten most actively traded bonds on the NYSEs Automated Bond System (ABS). A significant percentage of the trading in these bonds is carried out on the ABS, but retail-sized transactions and time-clustering mandate an approach that accommodates irregularly spaced quotes. Latent volatility for each bond is extracted using an autoregressive conditional duration model that provides input into an ordered probit model for observed spreads. For the most part, the authors find a significant positive relationship between latent volatility and observed spread, and a negative relationship between a trading volume

Convertible Bond Prices and Inherent Biases

This examination of the pricing performance of a reduced-form convertible bond valuation model uses a recent sample of monthly U.S. convertible bond prices observed over January 2001–September 2002. Recent U.S. data help us understand the particular market. The model produces prices that are consistently lower than observed market prices when the embedded conversion option is in the money and higher than observed market prices when the conversion option is out of the money. Evidence from the sample suggests that the deep out-of-the-money bias is not related to the theoretical models performance but rather the result of the fact that convertible bonds with low conversion value seem to be generally underpriced so much that their prices often imply negative embedded option values.

The Economic Value of Using Realized Volatility in Forecasting Future Implied Volatility

We examine the economic benefits of using realized volatility to forecast future implied volatility for pricing, trading, and hedging in the S&P 500 index options market. We propose an encompassing regression approach to forecast future implied volatility and hence future option prices by combining historical realized volatility and current implied volatility. An analysis of delta-neutral straddles and naked and delta-hedged option positions shows that the statistical superiority of historical realized volatility demonstrated in the encompassing regressions and option pricing errors does not translate into economic gains, when trading and hedging in the options markets, after considering trading costs.

Concentrated control and corporate value: a comparative analysis of single and dual class structures in Canada

This study directly examines the empirical relationship between corporate value and three distinct ownership structures using data from Canada, where the security laws and shareholder protection conditions are similar to those of the US (La Porta et al., 1999) but corporate control tends to be more concentrated (Holderness et al., 1999). Ownership structure is classified in three ways: dual class firms, single class closely-held firms and widely-held firms. The focus of this article is to test for the impact of concentrated control on corporate value using either dual class or single class closely-held ownership structure. The empirical results, using both fixed and random effects estimation methods, show that after controlling for size, financial leverage, percentage of outside directors and industry differences, dual class companies sell at a significant discount compared to closely-held single class companies. Consistent with Claessens et al. (2002), and Gompers et al. (2004) dual class structure in Canada lessens corporate value because it lowers shareholder and manager alignment and increases agency problems. We also find that pyramid structure has a negative impact on value in both dual class and single class closely-held companies.

The Economic Value of Using Realized Volatility in the Index Options Market

We examine the economic benefits of using high frequency volatility measures for pricing, trading and hedging in the S&P 500 index options market. Using the encompassing regression framework, we generate volatility forecasts combining information from long memory high-frequency volatility specifications and option-based implied volatilities. We conduct out-of-sample tests of the volatility forecasts by examining option pricing performance, trading performance based on volatility timing strategies, and the performance of covered options positions for index option writers. Our results support combining forecasts of implied volatility and realized volatility and illustrate that the realized volatility approach has economic value in the context of option pricing and risk management.

Concentrated Control: A Comparative Analysis of Single and Dual Class Structures on Corporate Value

This study directly examines the empirical relationship between corporate value and three distinct ownership structures using data from Canada, where the securities laws and shareholder protection conditions are similar to those of the US (La Porta et al., 1999) but corporate control tends to be more concentrated (Holderness et al., 1999). Ownership structure is classified in three ways: dual class firms, single class closely-held firms, and widely-held firms. The focus of this paper is to test for the impact of concentrated control on corporate value using either dual class or single class closely-held ownership structure. The empirical results show that after controlling for size, financial leverage, percentage of outside directors, and industry differences, dual class companies sell at a significant discount compared to closely-held single class companies. Consistent with Claessens et al. (2002), dual class structure in Canada lessens corporate value because it lowers shareholder and manager alignment and increases agency problems. We also find that pyramid structure has a negative impact on value in the case of single class closely-held companies.

Private or Public Debt? Effect of Crisis on Financial Intermediation

How did the crisis impact financial intermediation? We address this question by studying a unique market segment, viz. foreign private debt issued in the U.S., which grew in size despite the financial crisis. Specifically, foreign private (or Rule 144A) debt issued in the U.S. increased more than five-fold as between pre-crisis (1999-06) and crisis (2007-09) periods compared to public (or Yankee) debt. At the same time, domestic private (144A) debt issuances by U.S. firms remained relatively flat. Using an exhaustive sample of foreign bond issuances in the U.S. from over 65 countries between 1990 and 2013, we examine the effects of the financial crisis on three key corporate decisions viz., debt choice, pricing, and market timing comparing public (Yankee) and private (Rule 144A) debt issues for all foreign firms. We find that Qualified Institutional Buyers (QIBs), the only investors in unregistered 144A bonds, were preferentially funding foreign firms in the 144A market and at better spreads, despite the firms’ high idiosyncratic risks and leverage, and excessive underlying local market volatility. However, we see no such preference in 144A lending to domestic U.S. borrowers. Overall, our findings are consistent with the flight of intermediation in that while many good quality foreign firms began issuing in U.S. due to local capital constraints, QIBs were able to better allocate their scarce capital in favor of quality private debt borrowers.

Information Processing in the Secondary Foreign Rule 144A Debt Market

We study secondary market trades of debt issues by foreign firms in the U.S. under SEC Rule 144A, a unique market where the counterparties are qualified institutional buyers (QIBs). We find that even though the secondary yield spreads of foreign 144A debt issues are larger than comparable public debt issues by foreign and domestic firms in the U.S., the incremental impact of common risks – namely, credit, illiquidity, governance, and familiarity risks – on spreads are lower for foreign 144A issues compared to various control samples. Our finding is consistent with the notion that institutional participants, namely QIBs, play a specialized role in mitigating risk exposures in the foreign 144A secondary market.