Editor’s Letter

In light of the relatively tight credit spreads in today’s marketplace, the focus of this issue of The Journal of Fixed Income is on the evaluation of credit risk. In our lead article, George Batta and Wan Wongsunwai find that structural bankruptcy prediction models are unaffected by potential equity misevaluation, but they also conclude that hazard model forecasting accuracy for properly valued firms is greater than for misvalued firms. In the next article, Oliver Blümke provides evidence supporting the negative correlation between the discriminatory power of ratings and default rates. Comparison with a benchmark that accounts for the credit cycle is important to avoid unnecessary false detection of underperformance.

In their article, Yusho Kagraoka and Zakaria Moussa provide a methodology to extract the credit risk premium in sovereign government bonds via credit default swap (CDS) spreads in order to generate a term structure of risk-free interest rates and apply it to Japan. In the next article, Andreas Wengner, Niklas Lampenius, and Timo Haas find evidence of spillover effects for European sovereign downgrades that generated negative abnormal stock returns and positive abnormal CDS spread changes in the 2009–2012 period. The firms in the safe-harbor sovereign country (Germany) benefited, however, showing positive abnormal returns. Then, Liying Wang provides evidence, consistent with margin-based asset pricing theories, that during the 2007–2009 financial crisis the CDS basis decreased as the funding cost, credit risk premium, and illiquidity increased.

Finally, Srinivas Nippani and Stanley Smith examine the impact of the October 2013 partial U.S. government shutdown on the yields of Treasury bills and find a significant impact on four-week Treasury bill yields relative to high-quality commercial paper.

We hope you enjoy this issue of The Journal of Fixed Income. Your continued support of the Journal is greatly appreciated.

TOPICS: Fixed income and structured finance, fixed-income portfolio management, portfolio theory

Stanley J. Kon

Editor

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