Editor’s Letter

The value of the bonds and stock issued by the same company are a function of the same underlying assets of the firm. Hence, a factor approach to explaining the cross section of expected returns in equity markets should have relevance in bond markets. We begin this issue of The Journal of Fixed Income with an article by Thomas Heckel, Zine Amghar, Isaac Haik, Olivier Laplénie, and Raul Leote de Carvalho that provides an in-depth study of factor investing in corporate bond markets. They employ 33 factors within the four factor styles of value, quality, low risk, and momentum to explain the cross-section of corporate bond returns while neutralizing sectors, option-adjusted spreads, duration and size. Furthermore, they provide strategies that clearly outperform traditional benchmarks.

In the next article, Mao-Wei Hung and Wen-Hsin Tsai study the entire corporate bond process from initial rating agency downgrades to default or near default through bankruptcy filing and the ultimate recovery. Their analysis provides very useful information for distressed debt market participants. Next, James Chen provides empirical support for the normal distribution firm value diffusion process assumption in structural models of corporate bond valuation via the observed level of credit spreads and default experience.

Among the many regulatory changes emanating out of the 2008 financial crisis, there is a requirement to add bank capital during stress events. A debt instrument that converts to equity shares upon a trigger event provides such a mechanism. Krasimir Milanov, Ognyan Kounchev, and Frank J. Fabozzi derive and demonstrate a valuation model for this contingent convertible security that includes a call feature and the calculation of delta, gamma, duration, and convexity.

In the next article, Peng Zhang investigates the reduction in supply of long-term Treasuries as a result of debt ceiling legislation as an explanation for yield curve flattening. Empirical evidence supports the term spread being a function of a supply factor. Finally, Rintu Anthony and Krishna Prasanna examine the liquidity dimensions in emerging bond markets. Their evidence suggests that illiquidity increases with the maturity of the bond, but that trading cost is the more important dimension.

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 construction

Stanley J. Kon

Editor

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