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PhD Defense Mr. J.A.C. van Zundert, MSc

Title: Empirical Studies on the Cross-Section of Corporate Bond and Stock Markets
Supervisors: Prof. J.J.A.G. Driessen, Prof. F.C.J.M. de Jong

Summary

Companies can finance themselves in two ways: either they issue equity, i.e. sell part of the ownership in return for paying dividends, or they borrow money by arranging a loan in return for paying interest. Savers, individuals who do not need their wealth right away, can provide their capital to companies via public capital markets by buying stocks, equity, and/or corporate bonds, loans. As these markets play a key role in the world economy, the efficiency at which savers and companies are connected is of utmost importance. Efficient means that all stock and bond prices reflect all available information, and that therefore the capital is allocated optimally over all companies.

This dissertation comprises five empirical studies on the efficiency of stock and corporate bond markets. In summary, Jeroen van Zundert finds that these markets are not (fully) efficient.

Chapter 2 analyses the pricing of interest rate risk in stocks. Interest rate risk is usually studied for bonds: if interest rates increase (decrease) the price of a bond, of which the interest is fixed from the moment the bond is issued, declines (increases). Interest rate changes are the primary driver of bond prices. This chapter models, in contrast to previous studies, interest rate risk as an intrinsic component of stock returns, similar to how it is modeled for bonds. Van Zundert finds that interest rates are also important drivers of stock returns. Moreover, investors tend to be rewarded for bearing interest rate risk in the stock market, just as in the bond market, in the form of higher long-run returns.

In chapter 3 the relation between the pricing of the stock and of the corporate bonds of the same company is studied. Previous studies have found that these tend to move together: if stock prices increase (decrease), corporate bond prices increase (decrease), as both stock and bond holders benefit if the company generates profits. Instead of analyzing this co-movement in returns, Van Zundert compares the expected returns priced in by investors in stocks and corporate bonds, and finds a negative relation instead.

Chapter 4 describes an enhanced version of the classic momentum strategy. Momentum is the phenomenon that assets, such as stocks and bonds, which increase in price tend to see further price appreciations, and vice versa. Usually, a momentum strategy is based on buying assets with the highest past returns, called “winners”, and selling those with the lowest past returns, dubbed “losers”, profiting the price appreciation of the winners and the price depreciation of the losers. It is shown that theoretically and empirically, it is a better strategy to use return-to-volatility. Intuitively, for an asset with a volatility of 5%, a 3% return is large, while for an asset with a 50% volatility 3% is relatively small. Return-to-volatility corrects for this volatility difference, leading to higher risk-adjusted returns for the momentum strategy.

In chapter 5 the spillover of momentum from the stock of a company to the corporate bond of the same company is studied. Large predictive power is found, i.e. past stock winners tend to be future corporate bond winners, and this effect is especially strong when the stock return is cleansed for systematic risks.

Finally, chapter 6 studies the pricing of the well-known stock market factor premiums size, value, momentum and low-risk. The premiums are also found to be present in corporate bond markets, and can therefore offer corporate bond investors a better risk-return tradeoff, even if these factor premiums are also employed in the stock-allocation within their overall portfolio.


Location: Cobbenhagen building, Auditorium (access via Koopmans building)


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When: 19 January 2018 14:00

Where: Route description Tilburg University campus