The local versus the unbiased expectations hypothesis with discrete compounding

Article Abstract:

A comparative analysis between the local and unbiased expectations hypothesis is conducted to show that the difference between the two is more than Jensen's Inequality in discrete time. These two hypotheses can theoretically be different, apart from Jensen's Inequality, if forward prices are statistically independdent and follow a martingale. Forward prices are empirically shown to be highly correlated and thus dependent and do not necessarily possess the martingale property. The prediction efficiency of the two hypotheses are also compared.

Analysis, Rational expectations (Economics), Statistical hypothesis testing

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Determinants of the call option on corporate bonds

Article Abstract:

Interest rates and bond maturity are more crucial determinants of a call option to debt of corporate bonds than agency costs. A study of valuable and non-valuable corporate bonds issued from 1977-86 reveals a high correlation of call options on corporate bonds with the level of interest rates and the maturity of debt issue. The call feature is more likely during periods of higher interest rates for longer maturity bonds. No evidence is found that the call option provides managerial flexibility and tax advantages.

Management, Finance, Options (Finance), Debt financing (Corporations), Debt financing

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Hedging bonds subject to credit risk

Article Abstract:

Basis risk plays a vital role on corporate bonds' hedging performance. Utilization of four easy-to-use hedge ratios revealed that for high credit quality bond portfolios, the availability of a corporate hedging instrument greatly helps in enhancing existing hedging practice. For low credit quality bonds, improvement in hedging practice is associated with the use of a corporate index as the hedging instrument.

Asset & Risk Management, Hedging (Finance)

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