Susan D. Jordan

Seasonality in Daily Bond Returns

This paper tests for seasonal patterns in corporate bond returns using the Dow Jones Composite Bond Average. Each seasonal pattern documented for equities is investigated. For the period 1963–1986, corporate bond returns exhibit January, turn-of-the-year, and weekof-the-month effects, but no significant day-of-the-week or turn-of-the-month effects. In contrast, for the S&P 500 stock index, the turn-of-the-month and day-of-the-week effects are highly significant, but the week-of-the-month effect is less significant, and the January and turn-of-the-year effects are insignificant. The behavior of an equity index constructed using companies in the bond index is similar to that of the S&P, except the turn-of-the-year effect is significant.

Salomon Brothers and the May 1991 Treasury Auction: Analysis of a Market Corner

In May 1991, the Treasury sold

A Reexamination of Option Values Implicit in Callable Treasury Bonds

12.29 billion in two-year notes. Through improper bidding, Salomon Brothers gained control of at least 86 percent of the issue. This study investigates the impact of Salomons attempted corner by examining the postauction price behavior of the two-year note. Based on a no-arbitrage relation, the results show that the two-year note was substantially overpriced for approximately six weeks following the auction. The typical mispricing during this period is estimated at 0.16 to 0.25 percent of par. In dollar terms, the aggregate misvaluation averaged

The mispricing of callable U.S. treasury bonds: A closer look

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Hedging Interest Rate Risk with Futures Portfolios under Full-Rank Assumptions

30 million, and, by controlling the supply of the issue, Salomon stood to gain substantially from the squeeze.

Measuring Risk in Fixed Payment Securities: An Empirical Test of the Structured Full Rank Covariance Matrix

Longstaff (1992) and Edleson, Fehr, and Mason (1993) examine option values implicit in callable Treasury bonds and report a significant puzzle: implied option values are frequently negative. Using an alternative approach, we reexamine this issue and find implied option values are generally positive, and, in contrast to previous studies, instances of option values that are negative enough to overcome the bid-ask spread are relatively rare. We explain the findings in other studies by showing that the methodology used can potentially lead to the appearance of a negative option value when the true value is positive.

Predictability in Bond ETF Returns

INTRODUCTION An ongoing controversy exists concerning the valuation of callable U.S. Treasury bonds. Recent studies by Longstaff (1992) and Edleson, Fehr, and Mason (1993) compare market prices for callable and noncallable Treasury issues in an attempt to estimate the value of the options embedded in the callable bond. Surprisingly, both studies find that negative option values are very common, implying that callable Treasury bonds are significantly overpriced. In contrast, in an expanded analysis, Jordan, Jordan, and Jorgensen (1995) find that negative option values very rarely occur. Most recently, Carayannopoulos (1995) reexamines the issue with a broader sample of callable bonds and, as in Longstaff and in Edleson et al., reports that negative option values are quite frequent, thereby reopening the debate. Furthermore, unlike previous studies, Carayannopoulos (1995) reports that negative implied put values are much more common than negative implied call values. Carayannopoulos also documents a coupon effect indicating that negative option values are concentrated in lower coupon callable bonds.

Are Bond ETF Investors Smart

A spot portfolio of rate-sensitive assets can be hedged by a portfolio of interest-sensitive futures contracts. The hedge ratios of minimum-variance portfolios are unique when the fixed cash flows of underlying instruments are linearly independent and when the covariance matrix of unexpected changes in spot rates over the term of the cash flows is of full rank. Hilliards (1984) full-rank model has produced smaller portfolio variances than a duration model in a short-term hedging context. However, the methodology typically requires extensive econometric analysis. This paper develops a structured covariance matrix of full rank that requires only one parameter estimate. Hedging examples are provided.

Do Long Interest Rates Ever Fall

The appropriate set of parameters determining the volatility of the value of a portfolio of fixed cash flows of arbitrary maturities is the covariance matrix of unexpected interest rate changes over the term. Equilibrium models of the term structure limit the rank of the covariance matrix and implicitly impose restrictions on covariance estimation. The “full information†approach to risk measurement imposes only time stationarity assumptions on covariance matrix estimators and can result in sample matrices of full rank. Hilliard and Jordan (1989) develop a structured full rank covariance matrix that depends on only two parameters. This paper tests the Hilliard-Jordan model using likelihood ratios and criteria of forecast accuracy.

Bond ETF Arbitrage Strategies and Daily Cash Flow

This article studies the persistence of bond exchange-traded fund (ETF) premiums and discounts. Following a day of high or low premiums or discounts over net asset value (NAV), ETFs tend to maintain a premium or discount for up to 30 days. Premiums and discounts also predict distinct patterns of returns after daily closing. Overnight returns are negative following a high premium, while ETFs with large discounts are followed by positive overnight returns. The large discount ETFs have substantially higher returns than high premium ETFs over the subsequent thirty days. We find that traditional liquidity measures, along with prior deviations from NAV, are significant in explaining a fund’s premiums/discounts. Finally, we examine a long–short portfolio strategy to exploit the observed deviations from NAV and find it generates an alpha of 0.96% per month or about 11.5% per year.