Editor’s Letter

The financial market crisis of 2008 continues to be a data source for productive research. We begin this issue of The Journal of Fixed Income with an article by San-Lin Chung, Chen-Wei Kao, Chunchi Wu, and Chung-Ying Yeh concerning both insurer-specific and systematic components of counterparty risk on municipal bond pricing. They provide evidence of a higher counterparty risk premium on illiquid and speculative-grade bonds. In the next article, Jing-Zhi Huang, Marco Rossi, and Yuan Wang find that a negative effect of sentiment on yields is stronger when fundamental risk and liquidity frictions are higher, and the effect is stronger when the returns to capital structure arbitrage are higher. Then, Ivelina Pavlova, Ann Marie Hibbert, Joel R. Barber, and Krishnan Dandapani provide evidence of a negative relation between credit spread changes and changes in term structure variables, stock market conditions, bond volatility, and aggregate liquidity.

The determinants and magnitudes of credit-spread components are very important to the performance and risk management of investment portfolios. In the next article, Jørgen K. Sæbø examines the complex issues and potential biases in the data. The analysis also provides empirical evidence on the explanatory power of the structural model. In the next article, Tim Xiao proposes a credit value model that relies on the probability distribution of default time rather than the default time itself. The evidence indicates a more accurate valuation and demonstrates the benefit of diversification.

Finally, Gerhard Hambusch, KiHoon Jimmy Hong, and Ellenora Webster employ an active bond portfolio strategy that incorporates the time-series momentum in sovereign bond markets in order to achieve higher expected returns without increasing return volatility. Furthermore, the article examines the enhancement of this strategy in combination with international equity indexes.

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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