Returns and volatility of low-grade bonds, 1977-1989

Article Abstract:

This paper examines the risks and returns of long-term low-grade bonds for the period 1977-1989. We find: (1) low grade bonds realized higher returns than higher-grade bonds and lower returns than common stocks, and low-grade bonds exhibited less volatility that higher-grade bonds due to their call features and high coupons; (2) there is no relation between the age of low-grade bonds and their realized returns; cyclical factors explain much of the observed relation between default rates and bond age; and (3) low-grade bonds behave like both bonds and stocks. Despite this complexity there is no evidence that low-grade bonds are systematically over- or under-priced. (Reprinted by permission of the publisher.)

Investments

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Is the risk of bankruptcy a systematic risk?

Article Abstract:

Several studies suggest that a firm distress risk factor could be behind the size and the book-to-market effects. A natural proxy for firm distress is bankruptcy risk. If bankruptcy risk is systematic, one would expect a positive association between bankruptcy risk and subsequent realized returns. However, results demonstrate that bankruptcy risk is not rewarded by higher returns. Thus a distress factor is unlikely to account for the size and book-to-market effects. Surprising, firms with high bankruptcy risk earn lower than average returns since 1980. A risk-based explanation cannot fully explain the anomalous evidence. (Reprinted by permission of the publisher.)

Research, Risk (Economics), Bankruptcy

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The long-run stock returns following bond ratings changes

Article Abstract:

This article examines bond ratings changes from 1970-1997, finding that underraction to the announcement of downgrades results in poor earnings. Results also reveal no reliable abnormal returns after upgrades, but negative abnormal returns in the first year after downgrades were found; underpreformances are more pronounced for small, low-credit firms.

World, Statistical Data Included, Profits, Corporate profits

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