Editor’s Letter

The 2010 Dodd–Frank Act changed the regulatory environment for financial institutions and, hence, the supply-demand characteristics in the bond market. We begin this issue of The Journal of Fixed Income with an article by Louis Ederington, Jeremy Goh, Yen Teik Lee, and Lisa Yang that investigates the effects of the repeal of credit rating agency exemptions from Regulation Fair Disclosure. They find that prior to the repeal, rating changes were informative in both stock and bond prices, but no longer in the stock market thereafter. Furthermore, they suggest that the continued bond market price reaction is primarily due to the different regulatory effects between investment grade and speculative bond designations.

Value investing is a well-documented strategy in equity investing, but is there an application in the bond market? Shawn Shen, Arom Pathammavong, and Alex Chen provide evidence that their model-implied option-adjusted spreads can be used to increase portfolio returns, but with additional volatility. Also, their value factor works better in the investment grade sector than high yield. In the next article, Maksim Isakin and Xiaoling Pu examine the relationship between political risk and credit control. Their empirical evidence indicates that the value of credit control increases with political risk among firms with an investment grade rating, large size, less leverage, and lower equity volatility.

In the next article, Seungho Baek, Kwan Yong Lee, and Mina Glambosky show that abnormal returns generated through currency carry trades are a function of cross-country yield curves. Higher currency carry returns are generated when yield curve interest rate gaps are wide over all maturities. They also provide evidence that systematic cross-country inflation gaps, economic cycles and monetary policies explain the carry returns.

Finally, Hyeongjun Kim, Hoon Cho, and Doojin Ryu propose a model for estimating the default probability of a construction surety bond. They show that default risk is a function of firm size, leverage ratio, and account receivables.

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

Stanley J. Kon

Editor

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