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Essays in empirical asset pricing with corporate bonds
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Dickerson, Alexander Maxwell (2022) Essays in empirical asset pricing with corporate bonds. PhD thesis, University of Warwick.
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Official URL: http://webcat.warwick.ac.uk/record=b3982181
Abstract
This thesis consists of three papers on topics in empirical asset pricing with a particular focus on corporate bonds. The first paper shows that firm default risk is the primary predictor of the correlation between corporate bond and stock returns, both in the cross-section and over time. Bonds of less creditworthy firms behave more like the issuing firms’ stocks, resulting in higher future comovement. As a direct implication, investing in bonds and stocks of the most creditworthy firms significantly enhances diversification benefits and Sharpe ratios out-of-sample. We develop a structural model with stochastic asset variance that rationalizes these findings, whereby time-variation in asset variance plays a critical for breaking down the perfect stock-bond correlation implied by the Merton model. In the second paper, we study the cross-sectional and times-series effects of inflation risk in the corporate bond market. Exposure to conditional deflation risk is the primary channel that drives inflation risk premia in the cross-section of excess bond returns. The reward for bearing inflation risk is thus concentrated in the left tail of the inflation distribution and is not compensation for other common sources of risk in the bond market. Consistent with literature which incorporates nominal rigidities to explain the real effects of inflation, bonds issued by firms with higher levels of sticky leverage exhibit larger inflation risk premia. Finally, the third paper studies the information content of trading volume in the context of cryptocurrency markets and contributes to a growing literature that aims to understand the role of digital assets as an investment. The main results show that the interaction between lagged shocks to volume and past returns, positively and significantly correlates with future returns across cryptocurrency pairs. Such in-sample predictive power is economically significant; a reversal investment strategy that condition on low volume generates a significant risk-adjusted returns with low betas on standard sources of systematic risk.
Item Type: | Thesis (PhD) | ||||
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Subjects: | H Social Sciences > HB Economic Theory H Social Sciences > HG Finance |
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Library of Congress Subject Headings (LCSH): | Capital assets pricing model, Corporate bonds, Inflation risk, Cryptocurrencies, Investments | ||||
Official Date: | December 2022 | ||||
Dates: |
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Institution: | University of Warwick | ||||
Theses Department: | Warwick Business School | ||||
Thesis Type: | PhD | ||||
Publication Status: | Unpublished | ||||
Supervisor(s)/Advisor: | Müller, Philippe | ||||
Format of File: | |||||
Extent: | xii, 172 pages : illustrations | ||||
Language: | eng |
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