IDEAS home Printed from https://ideas.repec.org/p/drm/wpaper/2015-39.html
   My bibliography  Save this paper

Designing a corporate bond index on solvency criteria

Author

Listed:
  • Lauren Stagnol

Abstract

Doubts are rising whether bond indices, in the way they are constructed, are effective in their role of representing the markets they are designed for. Since index constituents are defined on market shares –the larger the debt obligation, the larger the share in the index– it may be that certain risks related to a high level of indebtedness are being accentuated and not necessarily representative of the market as a whole. Undue debt levels would in theory not arise in an information-efficient market, however, if prices are distorted, it makes sense to compensate for that and add elementary information on the debt issuers to the index construction process. We test how that works out on corporate bonds. We build a bond index that is based on firm accounting data rather than debt market value, and give evidence that it may serve as a market proxy.

Suggested Citation

  • Lauren Stagnol, 2015. "Designing a corporate bond index on solvency criteria," EconomiX Working Papers 2015-39, University of Paris Nanterre, EconomiX.
    • Handle: RePEc:drm:wpaper:2015-39
    as

    Download full text from publisher

    File URL: http://economix.fr/pdf/dt/2015/WP_EcoX_2015-39.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    2. Houweling, Patrick & Mentink, Albert & Vorst, Ton, 2005. "Comparing possible proxies of corporate bond liquidity," Journal of Banking & Finance, Elsevier, vol. 29(6), pages 1331-1358, June.
    3. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    4. Chen, Chen & Chen, Rong & Bassett, Gilbert W., 2007. "Fundamental indexation via smoothed cap weights," Journal of Banking & Finance, Elsevier, vol. 31(11), pages 3486-3502, November.
    5. Marielle de Jong & Hongwen Wu, 2014. "Fundamental indexation for bond markets," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 15(3), pages 264-274, May.
    6. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
    7. Gerlach, Stefan & Wolff, Guntram B. & Schulz, Alexander, 2010. "Banking and Sovereign Risk in the Euro Area," CEPR Discussion Papers 7833, C.E.P.R. Discussion Papers.
    8. Roncalli, Thierry, 2013. "Introduction to Risk Parity and Budgeting," MPRA Paper 47679, University Library of Munich, Germany.
    9. Victor DeMiguel & Lorenzo Garlappi & Raman Uppal, 2009. "Optimal Versus Naive Diversification: How Inefficient is the 1-N Portfolio Strategy?," The Review of Financial Studies, Society for Financial Studies, vol. 22(5), pages 1915-1953, May.
    10. James B. Thomson & Gary Whalen, 1988. "Using financial data to identify changes in bank condition," Economic Review, Federal Reserve Bank of Cleveland, vol. 24(Q II), pages 17-26.
    11. Hilscher, Jens Dietrich & Campbell, John Y. & Szilagyi, Jan, 2011. "Predicting Financial Distress and the Performance of Distressed Stocks," Scholarly Articles 9887619, Harvard University Department of Economics.
    12. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    13. Christian Walkshäusl & Sebastian Lobe, 2010. "Fundamental indexing around the world," Review of Financial Economics, John Wiley & Sons, vol. 19(3), pages 117-127, August.
    14. Walkshäusl, Christian & Lobe, Sebastian, 2010. "Fundamental indexing around the world," Review of Financial Economics, Elsevier, vol. 19(3), pages 117-127, August.
    15. Dumitrescu, Elena-Ivona & Hurlin, Christophe, 2012. "Testing for Granger non-causality in heterogeneous panels," Economic Modelling, Elsevier, vol. 29(4), pages 1450-1460.
    16. Marielle de Jong & Hongwen Wu, 2014. "Fundamental indexation for bond markets," Journal of Risk Finance, Emerald Group Publishing, vol. 15(3), pages 264-274, May.
    17. Kwan, Simon H., 1996. "Firm-specific information and the correlation between individual stocks and bonds," Journal of Financial Economics, Elsevier, vol. 40(1), pages 63-80, January.
    18. Gurdip Bakshi & Dilip Madan & Frank Xiaoling Zhang, 2006. "Investigating the Role of Systematic and Firm-Specific Factors in Default Risk: Lessons from Empirically Evaluating Credit Risk Models," The Journal of Business, University of Chicago Press, vol. 79(4), pages 1955-1988, July.
    19. Downing, Chris & Underwood, Shane & Xing, Yuhang, 2009. "The Relative Informational Efficiency of Stocks and Bonds: An Intraday Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(5), pages 1081-1102, October.
    20. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    21. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    22. Brigette Forbes & Anup Basu, 2011. "Does Fundamental Indexation Lead to Better Risk Adjusted Returns? New Evidence from Australian Securities Exchange," School of Economics and Finance Discussion Papers and Working Papers Series 275, School of Economics and Finance, Queensland University of Technology.
    23. Das, Sanjiv & Kalimipalli, Madhu & Nayak, Subhankar, 2014. "Did CDS trading improve the market for corporate bonds?," Journal of Financial Economics, Elsevier, vol. 111(2), pages 495-525.
    24. Maurice J.G. Bun & Sarafidis, V., 2013. "Dynamic Panel Data Models," UvA-Econometrics Working Papers 13-01, Universiteit van Amsterdam, Dept. of Econometrics.
    25. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    26. Jacobs, Bruce I. & Levy, Kenneth N., 2015. "Smart beta: too good to be true?," Journal of Financial Perspectives, EY Global FS Institute, vol. 3(2), pages 155-159.
    27. Edward I. Altman, 1968. "The Prediction Of Corporate Bankruptcy: A Discriminant Analysis," Journal of Finance, American Finance Association, vol. 23(1), pages 193-194, March.
    28. Ohlson, Ja, 1980. "Financial Ratios And The Probabilistic Prediction Of Bankruptcy," Journal of Accounting Research, Wiley Blackwell, vol. 18(1), pages 109-131.
    29. G. S. Maddala & Shaowen Wu, 1999. "A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(S1), pages 631-652, November.
    30. David Blitz & Laurens Swinkels, 2008. "Fundamental indexation: An active value strategy in disguise," Journal of Asset Management, Palgrave Macmillan, vol. 9(4), pages 264-269, October.
    31. Kazuhiko Hayakawa, 2009. "First Difference or Forward Orthogonal Deviation- Which Transformation Should be Used in Dynamic Panel Data Models?: A Simulation Study," Economics Bulletin, AccessEcon, vol. 29(3), pages 2008-2017.
    32. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    33. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
    34. Maddala, G S & Wu, Shaowen, 1999. "A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-652, Special I.
    35. Pierre Collin-Dufresn & Robert S. Goldstein & J. Spencer Martin, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
    36. Julius Hemminki & Vesa Puttonen, 2008. "Fundamental indexation in Europe," Journal of Asset Management, Palgrave Macmillan, vol. 8(6), pages 401-405, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Marielle de Jong & Lauren Stagnol, 2016. "A fundamental bond index including solvency criteria," Journal of Asset Management, Palgrave Macmillan, vol. 17(4), pages 280-294, July.
    2. Gharehgozli, Orkideh, 2021. "An empirical comparison between a regression framework and the Synthetic Control Method," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 70-81.
    3. Dervis Kirikkaleli & Emine Ünar Kayar, 2023. "The Effect of Economic, Financial and Political Stabilities on the Banking Sector: Cases of Six Balkan Countries," Sustainability, MDPI, vol. 15(4), pages 1-16, February.
    4. Takashi Kamihigashi & Yosuke Sasaki, 2022. "The Impact of Multi-Factor Productivity on Income Inequality," Discussion Paper Series DP2022-31, Research Institute for Economics & Business Administration, Kobe University.
    5. Ryota Nakatani, 2017. "The Effects of Productivity Shocks, Financial Shocks, and Monetary Policy on Exchange Rates: An Application of the Currency Crisis Model and Implications for Emerging Market Crises," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 53(11), pages 2545-2561, November.
    6. Ronald MacDonald & Flávio Vieira, "undated". "A panel data investigation of real exchange rate misalignment and growth," Working Papers 2010_13, Business School - Economics, University of Glasgow.
    7. Binder, Michael & Hsiao, Cheng & Pesaran, M. Hashem, 2005. "Estimation And Inference In Short Panel Vector Autoregressions With Unit Roots And Cointegration," Econometric Theory, Cambridge University Press, vol. 21(4), pages 795-837, August.
    8. Sung, Bongsuk & Song, Woo-Yong & Park, Sang-Do, 2018. "How foreign direct investment affects CO2 emission levels in the Chinese manufacturing industry: Evidence from panel data," Economic Systems, Elsevier, vol. 42(2), pages 320-331.
    9. Somesh K. Mathur & Rahul Arora & Ishita Ghoshal & Sarbjit Singh, 2016. "Domestic Energy Consumption and Country’s Income Growth: A Quantitative Analysis of Developing and Developed Countries Using Panel Causality, Panel VECM, Panel Cointegration and SURE," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 14(1), pages 87-116, June.
    10. Alessio Ciarlone, 2019. "The relationship between financial development and growth: the case of emerging Europe," Questioni di Economia e Finanza (Occasional Papers) 521, Bank of Italy, Economic Research and International Relations Area.
    11. Ureche-Rangau, Loredana & Burietz, Aurore, 2013. "One crisis, two crises…the subprime crisis and the European sovereign debt problems," Economic Modelling, Elsevier, vol. 35(C), pages 35-44.
    12. Ricardo R. Moreira, 2019. "Inflation and real exchange rate and macroeconomic gaps: causality for 50 emerging and developing countries," Economics Bulletin, AccessEcon, vol. 39(1), pages 142-158.
    13. Ardeshiri, Mansour & Moghaddasi, Reza & Yazdani, Saeed & Mohamadinejad, Amir, . "Trade Openness and Spatial Distribution of Manufacturing Industries: Iranian Provincial Evidence," Asian Journal of Applied Economics, Kasetsart University, Center for Applied Economics Research, vol. 26(1).
    14. Anne Musson, 2012. "The importance of the stakeholders’ involvement in building indicators. The case of environmental regulation in France," Working Papers hal-02947023, HAL.
    15. Cristiana Tudor & Robert Sova, 2021. "On the Impact of GDP per Capita, Carbon Intensity and Innovation for Renewable Energy Consumption: Worldwide Evidence," Energies, MDPI, vol. 14(19), pages 1-25, October.
    16. Jean Vasile Andrei & Mihai Mieila & Mirela Panait, 2017. "The impact and determinants of the energy paradigm on economic growth in European Union," PLOS ONE, Public Library of Science, vol. 12(3), pages 1-17, March.
    17. Dehghan Shabani, Zahra & Shahnazi, Rouhollah, 2019. "Energy consumption, carbon dioxide emissions, information and communications technology, and gross domestic product in Iranian economic sectors: A panel causality analysis," Energy, Elsevier, vol. 169(C), pages 1064-1078.
    18. Hajamini, Mehdi & Falahi, Mohammad Ali, 2018. "Economic growth and government size in developed European countries: A panel threshold approach," Economic Analysis and Policy, Elsevier, vol. 58(C), pages 1-13.
    19. Andreas Dietrich, 2012. "Does growth cause structural change, or is it the other way around? A dynamic panel data analysis for seven OECD countries," Empirical Economics, Springer, vol. 43(3), pages 915-944, December.
    20. Khan , M. Zakir Saadullah & Hossain, M. Ismail, 2012. "Determinants of Trade Balance of Bangladesh: A Dynamic Panel Data Analysis," Bangladesh Development Studies, Bangladesh Institute of Development Studies (BIDS), vol. 35(2), pages 45-65, June.

    More about this item

    Keywords

    fundamental indexing; alternative corporate bond index; solvency criteria; market efficiency.;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:drm:wpaper:2015-39. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Valerie Mignon (email available below). General contact details of provider: https://edirc.repec.org/data/modemfr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.