nach oben

Review of Quantitative Finance and Accounting

Erschienen in:

01.05.2015 | Original Research

A methodology for computing and comparing implied equity and corporate-debt Sharpe Ratios

verfasst von: Robert S. Goldberg

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 4/2015

Einloggen

Aktivieren Sie unsere intelligente Suche, um passende Fachinhalte oder Patente zu finden.

search-config

KI-gestützte Suche

Aus

Abstract

This paper presents a macro-economic methodology for evaluating the forward-looking Sharpe Ratios of the equity and debt components of the United States public company capital structure. Using this framework, it is shown that the equity and debt Sharpe Ratios are both time variant and disparate. The methodology is used to review the risk aversion behavior of equity and debt market participants surrounding the past three major market events, the 1987 crash, the 2000–2001 Internet bubble and the 2008–2009 credit crisis. The forward-looking Sharpe Ratios are used to construct a dynamic portfolio of stocks and corporate bonds that outperforms a static portfolio on a risk-adjusted basis. This paper then offers market segmentation and the differing behavior of equity and corporate bond investors as an explanation for the observed Sharpe Ratios.

Vorheriger Artikel Relative performance evaluation, pay-for-luck, and double-dipping in CEO compensation

Nächster Artikel Foreign exchange option pricing in the currency cycle with jump risks

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

The Markowitz two asset optimization with a zero correlation results in an equity weight = λ _et/[λ _et + λ _dt * (σ _et/σ _dt)].

The Markowitz two asset optimization with a negative one correlation results in an equity weight = 1/[1 + * (σ _et/σ _dt)]. Equation (11) can be rewritten as W _et = 1/[1 + (σ _et/σ _dt) * (K _Et− r _et)/(K _dt− r _dt)].

Allen L, Gottesman A (2006) The informational efficiency of the equity market as compared to the syndicated loan market. J Financ Serv Res 30(1):5–42CrossRef

Avino D, Lazar E (2012) Rethinking capital structure arbitrage. Working paper, University of Reading

Berben R, Jansen WJ (2005) Bond market and stock market integration in europe. Working paper, De Nederlandsche Bank. No. 60. November

Bhamra HS, Kuehn L, Strebulaev IA (2010)The levered equity risk premium and credit spreads: a unified framework. Rev Financ Stud (23)2:646–703

Biglova A, Jasic T, Rachev S, Fabozzi FJ (2004) Profitability of momentum strategies: application of novel risk/return Ratio stock selection criteria. Invest Manag Financ Innov 4(2004):47–61

Bloomberg (2011a) CDS series. Bloomberg

Bloomberg (2011b) GB3, GT10 and GT30 Treasury bond series. Bloomberg

Campbell JY, Cochrane JH (1999) By force of habit: a consumption-based explanation of aggregate stock market behavior. J Political Econ 107(2):205–251CrossRef

CBO (1985–1990) Yearly Economic Forecasts. CBO, Washington, DC

Chen L, Collin-Dufresne P, Goldstein RS (2009) On the relation between the credit spread puzzle and the equity premium puzzle. Rev Financ Stud 22(9):3367–3409CrossRef

Cheung SA, Kwan CCY, Lee J (1995) The pricing of exchange rate risk and stock market segmentation: the Canadian case. Rev Quant Financ Acc 5:393–402

Cornell B (1999) The equity risk premium. Wiley, New Jersey

Cornell B (2012) Dividend-price ratios and stock returns: another look at the history. Working paper, California Institute of Technology

Damodaran A (2010) A new “risky” world order: unstable risk premiums implications for practice. Working paper, New York University

Damodaran A (2011) Equity risk premiums (ERP): determinants, estimations and implications-the 2011 edition. Working paper, New York University

De Jong F, De Roon FA (2005) Time-varing market integration and expected returns in emerging markets. J Financ Econ 78:583–613CrossRef

DeFusco RA, McLeavey DW, Pinto JE, Runkle DL (2007) Quantitative investment analysis, 2nd edn. Wiley, New Jersey, p 115

Dionne G, Gauthier G, Hammami K, Maurice M, Simonato JG (2010) Default risk in corporate yield spreads. Financ Manage 39(2):707–731CrossRef

Doran JS, Ronn EI, Goldberg RS (2009) A simple model for time-varying expected returns on the S&P 500 index. J Invest Manage 7:47–72

Driessen J (2005) Is default event risk priced in corporate bonds? Rev Financ Stud 18(1):165–195CrossRef

Duarte J, Longstaff FA, Yu F (2007) Risk and return in fixed-income arbitrage: nickels in front of a steamroller? Rev Financ Stud 20(3):769–811CrossRef

Duxbury D, Hudson R, Keasey K, Yang Z, Yao S (2013) How prior realized outcomes affect portfolio decisions. Rev Quant Financ Acc 41:611–629CrossRef

Elton EJ, Gruber MJ, Agrawal D, Mann C (2001) Explaining the rate spread on corporate bonds. J Financ 56:247–277CrossRef

Fetch JA, KeaRJ, Kutin JB, Schoen RJ, Vaillancourt JR (2013) Seeking a better balance: Putnam’s dynamic risk allocation strategy. Putnam Investments White Paper

Finnerty JD, Leistikow D (1993) The behavior of equity and debt risk premiums. J Portfolio Manage Summer 19(4):73–84

Forte S, Pena JI (2009) Credit spreads: an empirical analysis on the informational content of stocks, bonds and CDS. J Bank Financ 33(2009):2013–2025CrossRef

Frankfurter GM, Phillips HE, Fauk G (1999) The ex post performance of four portfolio selection algorithms. Rev Quant Financ Acc 13:347–366CrossRef

Giesecke K, Longstaff FA, Schaefer S, Strebulaev I (2011) Corporate bond default risk: a 150-year perspective. J Financ Econ 102(2011):233–250CrossRef

Goyenko R, Ukhov A (2009) Stock and bond market liquidity: a long-run empirical analysis. J Financ Quant Anal 44(1):189–212CrossRef

Guttler A (2005) Using a bootstrap approach to rate the raters. Fin Markets Portfolio Mgmt 19(3):277–295CrossRef

Huang JZ, Huang M (2012) How much of corporate-treasury yield spread is due to credit risk? Rev Asset Pricing Stud 2(2):153–202CrossRef

Hull J, Predescu M, White A (2005) Bond prices, default probabilities and risk premiums. J Credit Risk 1:53–60

Kanmg-por Fung L, Tam C, Yu I (2008) Changes in investors’ risk appetite- an assessment of financial integration and interdependence. IFC Bull 31:294–321

Laerd Statistics (2013) www.statistics.laerd.com, Lund Research Ltd

Lam K, Li W (2004) Is the ‘Perfect’ timing strategy truly perfect? Rev Quant Financ Acc 22:39–51CrossRef

Lin MC (2005) Returns and investor behavior in Taiwan: does overconfidence explain this relationship? Rev Pac Basin Financ Mark Policies 8(3):405–446CrossRef

Livingston Survey (2011) Historical data. Federal Reserve Bank of Philadelphia

Lochoff RW (1998) Beating the bond market with no skill. J Portfolio Manage 25:1CrossRef

Loffler G (2013) Can rating agencies look through the cycle? Rev Quant Financ Acc 40:623–646CrossRef

Marotta DJ (2012) Using dynamic asset allocation to boost returns. Marotta wealth management white paper

Mehra R (2003) The equity premium: why is it a puzzle? Financ Anal J. January/February:54–69

Mehra R, Prescott EC (1985) The equity premium: a puzzle. J Monet Econ 15:145–161CrossRef

Merrill Lynch (2011) COAO corporate bond master. Bloomberg

Merton RC (1973) On the pricing of corporate debt: the risk structure of interest rates. American Finance Association meetings

Modigliani F, Miller M (1958) The cost of capital, corporation finance and the theory of investment. Am Econ Rev 48(3):261–297

Moody’s Global Credit Policy (2009) Corporate default and recovery rates, 1920–2008. Moody’s Investors Service

Moody’s Investor Service (2003) Measuring the performance of corporate bond ratings. Special Comment, April 2003

Moody’s Investor Service (2011) Moody’s yield on seasoned corporate bonds-all industrials Baa. U.S. Federal Reserve Report H15

Rogers L (2010) Monthly momentum allocation by Sharpe Ratio—a tactical allocation strategy for maximizing risk-adjusted returns. National Association of Investment Managers Conference

Sharpe WF (1966) Mutual fund performance. J Bus 1966:119–138CrossRef

Sheskin DJ (2004) Handbook of parametric and nonparametric statistical procedures, 3rd edn. CRC, Chapman & Hall, p 694

SIFMA (2011) Report on US bond market outstanding and US bond market issuance. SIFMA 3/14/2011

Standard & Poor's (2011) History of S&P 500 dividends. Standard and Poors

Titman S (2002) The Modigliani and Miller theorem and the integration of financial markets. Financial management. Spring, New York, pp 101–115

US Census Bureau (2009) Table 1200. Federal reserve release Z.1. Flow of funds March 2010

Wang P, Kochard L (2012) Using a Z-score approach to combine value and momentum in tactical asset allocation. J Wealth Manage 15(1):52–71CrossRef

Welch I (2000) Views of financial economists on the equity premium and other issues. J Bus 73(4):501–537, with 2009 update

Welch I (2009) Views of economists about the equity premium and policy. Working paper UCLA

Whitelaw RF, Tang Y (2011) Time-varying sharpe ratios and market timing. Q J Financ 1(3):465–493CrossRef

Yu F (2006) How profitable is capital structure arbitrage? Financ Anal 62(5):47–62CrossRef

Titel: A methodology for computing and comparing implied equity and corporate-debt Sharpe Ratios
verfasst von: Robert S. Goldberg
Publikationsdatum: 01.05.2015
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 4/2015
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-013-0424-2

Springer Professional

Abstract

Bitte loggen Sie sich ein, um Zugang zu Ihrer Lizenz zu erhalten.

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Weitere Artikel der Ausgabe 4/2015

Underwriter reputation and pricing of risk: evidence from seasoned equity offerings

Stock manipulation and its effects: pump and dump versus stabilization

Relative performance evaluation, pay-for-luck, and double-dipping in CEO compensation

A comparison of earnings persistence in high-tech and non-high-tech firms

Earnings announcements, trading volume, and price discovery: evidence from dual class firms

Foreign exchange option pricing in the currency cycle with jump risks