This paper investigates the effects of macroeconomic fundamentals on emerging market sovereign credit spreads. We pay special attention to the volatility of fundamentals in addition to their levels. In reduced form regressions, the volatility of terms of trade in particular has a statistically and economically significant effect on spreads. We propose an empirically tractable model that addresses the distinct features of sovereign risk. Our model captures a significant part of the empirical variation in spreads. It fits better

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We conduct an analysis of the risk and return characteristics of a number of widely used fixed-income arbitrage strategies. We find that the strategies requiring more ‘‘intellectual capital’ ’ to implement tend to produce significant alphas after controlling for bond and equity market risk factors. These positive alphas remain significant even after taking into account typical hedge fund fees. In contrast with other hedge fund strategies, many of the fixed-income arbitrage strategies produce positively skewed returns. These results suggest that there may be more economic substance to fixedincome arbitrage than simply ‘‘picking up nickels in front of a steamroller.’’ During the hedge fund crisis of 1998, market participants were given a revealing glimpse into the proprietary trading strategies used by a number of large hedge funds such as Long-Term Capital Management (LTCM). Among these strategies, few were as widely used—or as painful—as fixedincome arbitrage. Virtually every major investment banking firm on Wall Street reported losses directly related to their positions in fixed-income arbitrage during the crisis. Despite these losses, however, fixed-income arbitrage has since become one of the most popular and rapidly growing sectors within the hedge fund industry. For example, the Tremont/TASS (2005) Asset Flows Report indicates that total assets devoted to fixed-income arbitrage grew by more than $9.0 billion during 2005 and that the total We are grateful for valuable comments and assistance from Vineer Bhansali, Charles Cao, Darrell Duffie,

What happens when investment grade bonds are downgraded to junk status? The received wisdom is that these fallen angels are sold by fixed income investors who, by regulation, are prohibited from investing substantial portions of their portfolios in speculative grade paper. We investigate insurance company sales of bonds that were downgraded to junk in order to document the extent of forced selling of fallen angels. We document substantially greater selling activity in fallen angel bonds around the time of the downgrade than in comparable bonds that are not downgraded. However, we also find that the level of bond trading activity is sufficiently low that a relatively small number of trades could result in a statistically significant effect. When we consider the overall magnitude of fallen angel sales activity relative to insurance company holdings, we conclude that regulatory pressure does not result in the wholesale liquidation of fallen angel holdings. What happens when investment grade bonds are downgraded to junk status? The received wisdom is that these fallen angels are sold by fixed income investors who, by

In Hull and White (2006) we showed how CDO quotes can be used to imply a probability distribution for the hazard rate over the life of the CDO. This is known as the “implied copula approach. ” In this paper we develop a parametric version of the implied copula approach and show how it can be used for valuing bespoke CDOs. Both homogeneous and heterogeneous versions of the model are presented and the differences between the results obtained from the two versions of the model are examined. Results are also presented for the situation where the model is extended so that hazard rates are driven by more than one factor.

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The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Federal Reserve Bank of San Francisco or the Board of Governors of the Federal Reserve System. Evidence on the costs and benefits of bond IPOs

Financial markets worldwide have been experiencing dramatic changes since the mid-1990s. It has been claimed that XBRL, an XML vocabulary for business reporting, is capable of introducing greater integration and transparency into financial information systems, and thus addressing some of the challenges presented by these changes. This paper presents an exploratory case study of the cooperative design, development and implementation of an XBRL-enabled inter-organisational system (IOS) by the Australian Prudential Regulation Authority (APRA), the Reserve Bank of Australia (central bank) and the Australian Bureau of Statistics to revolutionise reporting by financial institutions in Australia. The study describes how the three agencies modernised and harmonised reporting requirements through a gradual review of the reporting returns required by each agency. This harmonisation enabled the reengineering of the reporting process, as each financial institution now has to submit just one set of figures to meet the needs of all three agencies. The findings illustrate that the complexity of data consumption patterns drove increased interdependence within the financial information supply chain requiring the co-operative development of context sensitive data exchanges and commodity-like IT infrastructures. The paper concludes that the co-operative approach to IOS development exhibited in this study is likely to be more suited to the development of XBRL-enabled systems for financial information supply chains than the ‘hub and spoke ’ model characteristic of IOS developments in other industrial sectors. 1

Abstract: Using secondary market data on corporate bonds issued in Japan between 1997 and 2005, this paper explores the determinants of the credit spread of corporate bond rates over interest swap rates. We find that credit spreads properly reflect financial factors at the firm level, including debt-to-equity ratios, volatility, and maturity, particularly for longer-term bonds. In addition, an economy-wide factor common among bond issues unable to be captured by firm-level factors, plays an important role in determining credit spreads, and these economy-wide effects to a great extent cancel out firm-level factors for some subsample periods. We also identify possible factors responsible for the significant economy-wide effects.

This paper estimates the impact of accounting transparency on the term structure of CDS spreads for a large cross-section of …rms. Using a newly developed measure of accounting transparency in Berger, Chen & Li (2006), we …nd a downward-sloping term structure of transparency spreads. Estimating the gap between the high and low transparency credit curves at the 1, 3, 5, 7 and 10-year maturity, the transparency spread is insigni…cant in the long end but highly signi…cant and robust at 20 bps at the 1-year maturity. Furthermore, the e¤ect of accounting transparency on the term structure of CDS spreads is largest for the most risky …rms. These results are strongly supportive of the model by Du ¢ e & Lando (2001), and add an explanation to the underprediction of short-term credit spreads by traditional structural credit risk models. We thank Lombard Risk for access to the credit default swap data. We thank Christian