Choose an application

• Reference Manager
• EndNote
• RefWorks (Direct export to RefWorks)

The Great Depression in 1930 and the subprime mortgage financial crisis of 2008 are considered to be the most important financial market turbulence periods of the last century. The main consequences of the 2008 financial crisis were the bankruptcy of Lehman Brothers, difficulties of many financial intermediaries, an intensification of the liquidity crisis, and a strong repercussion in the financial market-place where a global “crash” of asset prices was observed. Particularly, the corporate bond market was affected by this crisis. These periods of stress have highlighted the importance of market liquidity and especially the need of being able to capture and understand its dimensions.
The corporate bond market is less liquid than the equity market due to the general framework in which it evolved, low price transparency, the paramount presence of institutional investors and the variety of bonds that could be designed for a single firm. For these reasons, it is quite challenging to capture liquidity components in the corporate bond market, and this has lead recent scientific literature to focus mainly on studies of liquidity exclusively on the equity market.
The purpose of this thesis is to study the determinants of commonality liquidity (the component of total liquidity shared by all bonds) in the corporate bond market. The first part of this thesis performs a survey of relevant literature, defines the most important concepts, and investigates potential economic and financial explanatory indicators that could drive commonality liquidity. The empirical research executed used TRACE data of daily transactions of 2,059 bonds covering the period 2006-2012. Prior to any analysis, a cleaning of the data was performed, and a computation of various liquidity measures (Amihud, imputed roundtrip costs and trading interval) was carried out. Weekly time-series liquidity measures for each of the 2,059 bonds were obtained after this step. Then, a principal component analysis was used to extract global factors in order to obtain the commonality liquidity.
Finally, a regression model tested the relationship of the obtained commonality liquidity with respect to three selected determinants: the federal funds rate, the inflation rate and the Chicago Board Options Exchange Volatility Index (CBOE VIX). The final results conclude that the constructed model could explain 45% of the total variability of the commonality liquidity and that the CBOE VIX indicator is the explanatory variable that can provide the most significant information.

Commonality, liquidity, --- corporate bond market --- Macroeconomic variables --- Sciences économiques & de gestion > Finance

Choose an application

• Reference Manager
• EndNote
• RefWorks (Direct export to RefWorks)

The spread between value and growth (also called the value premium) is one of the best accepted iterations of a market anomaly, however the reasons for the over performance of value portfolios over growth portfolios is still a source of debate. The nature of the risk that value stocks bear is often related to the fact that these companies have high ratios of fixed assets and thus, are less flexible than growth stocks in making adjustments during recessions.

The aim of this thesis is to contribute to the existing corpus of literature by identifying which macroeconomic factors have an impact on the value premium. This thesis tries to answer two main questions. First, can the value premium be explained by the business cycle risk? Second, do macroeconomic variables have an impact on the volatility of value, growth, and HML returns? Several econometrics models on the financial time series have been applied to answer these questions.

First, we analyzed the impact over business cycles of a set of macroeconomic variables on the value premium using a Markov Switching model. This model suggests several conclusions. First, that asymmetries can be observed over the business cycles for the value, growth and HML portfolios, meaning that they react differently to changes in economic conditions over to the business cycles. Then, during the economic downturn, value excess returns are more strongly affected compared to growth excess returns by certain macroeconomic factors, specifically the growth rate of gross private domestic investments, the growth rate of gross government investments, the term spread changes, the credit spread changes, the inflation rate, the growth rate of industrial production and the growth rate of the aggregated profits. These provide evidence that the value premium can be further explained by economic fundamentals rather than the behavior of investors. Our results prove that value stocks have to bear the macroeconomic risk and this is consistent with the flexibility hypothesis.

Then, this study identifies a set of macroeconomic factors which influence the prediction of the value and growth excess returns using the elastic net algorithm. These results confirm that macroeconomic factors are drivers of the value premium in both economic downturns as well as upturns.

Finally, using a subset of the data available in a monthly frequency, we have tested the impact of a set of macroeconomic variables on the volatility of value, growth and HML returns through the GARCH-G(1,1) and GARCH-S(1,1) models. The findings have led us to conclude that macroeconomic variables have a significant impact on the value and growth excess returns and therefore, also influence the volatility of the value premium.

Value investing --- Business cycle --- Value premium --- Markov Switching model --- Elastic-net --- GARCH --- GARCH-S --- GARCH-G --- Macroeconomic variables --- Sciences économiques & de gestion > Finance