ABSTRACT
COVID pandemic has highlighted the importance of hedging against catastrophic events, for which the catastrophe bond market plays a critical role. Our paper develops a two-level modelling and uses a unique, hand-collected dataset, which is one of the largest and most detailed datasets to date containing: 101 different issuers, 794 different bonds, spanning 1997–2020. We identify issuer effects robustly, isolating them from bond specific pricing effects, therefore providing more credible pricing factor results. We find that bond pricing and volatility are heavily impacted by the issuer, causing 26% of total price variation. We also identify specific issuer characteristics that significantly impact bond pricing and volatility, such as the issuer's line of business accounting for up to 36% of total price variation. We further find that issuer effects are significant over different market cycles and time periods, causing substantial price variation. The size and content of our data also enables us to identify the counter-intuitive relation between bond premiums and maturity, and bond premiums and hybrid bond triggers. © 2022 Elsevier Inc.
ABSTRACT
COVID pandemic has highlighted the importance of hedging against catastrophic events, for which the catastrophe bond market plays a critical role. Our paper develops a two-level modelling and uses a unique, hand-collected dataset, which is one of the largest and most detailed datasets to date containing: 101 different issuers, 794 different bonds, spanning 1997–2020. We identify issuer effects robustly, isolating them from bond specific pricing effects, therefore providing more credible pricing factor results. We find that bond pricing and volatility are heavily impacted by the issuer, causing 26% of total price variation. We also identify specific issuer characteristics that significantly impact bond pricing and volatility, such as the issuer’s line of business accounting for upto 36% of total price variation. We further find that issuer effects are significant over different market cycles and time periods, causing substantial price variation. The size and content of our data also enables us to identify the counter-intuitive relation between bond premiums and maturity, and bond premiums and hybrid bond triggers.
ABSTRACT
In the financial crisis and recession induced by the Covid-19 pandemic, many investment-grade firms became unable to borrow from securities markets. In response, the Fed not only reopened its commercial paper funding facility but also announced it would purchase newly issued and seasoned corporate bonds rated as investment grade before the Covid pandemic. We assess the effectiveness of this program using long sample periods, spanning the Great Depression through the Great and Covid Recessions. Findings indicate that the announcement of corporate bond backstop facilities helped stop risk premia from rising further than they had by late-March 2020. In doing so, these backstop facilities limited the role of external finance premia in amplifying the macroeconomic impact of the Covid pandemic. Nevertheless, the corporate bond programs blend the roles of the Federal Reserve in conducting monetary policy via its balance sheet, acting as a lender of last resort, and pursuing credit policies.