"The Cost of Capital for Banks: Evidence from Analyst Earnings Forecasts" (with Jacob Gyntelberg and Christoffer Thimsen), 2021, forthcoming Journal of Finance.
Abstract: We extract cost of capital measures for banks using analyst earnings forecasts, which we show are unbiased. We find that the cost of equity and the cost of debt decrease in the Tier 1 ratio, whereas total cost of capital is uncorrelated with the Tier 1 ratio. These findings suggest that investors adjust their return expectations for banks in accordance with the Modigliani-Miller (1958) conservation of risk principle. Hence, increased capital requirements are not made socially costly based on a notion that market pricing violates risk conservation. Equity can nevertheless still be privately costly for banks because of reduced subsidies.
"The Value of Bond Underwriter Relationships" (with Mads Stenbo Nielsen and Stine Louise von Rüden), 2021, Journal of Corporate Finance, 68.
- The paper was presented at the 2020 AFA conference in San Diego.
Abstract: We show that corporate bond issuers benefit from utilizing existing underwriter relationships when rolling over bonds, but at the same time become exposed to underwriter distress. A strong relationship enables the underwriter to credibly certify the issuer resulting in lower direct issuance costs and lower underpricing. However, if the underwriter becomes distressed, this spills over to the issuer's credit risk, because it weakens the relationship and increases the risk of involuntary relationship termination. The credit risk spillover is more pronounced for risky, information-sensitive issuers with high rollover exposure, i.e., those issuers most in need of certification by an underwriter.
“Highly Liquid Mortgage Bonds using the Match Funding Principle” (with Jacob Gyntelberg), 2020, Quarterly Journal of Finance, 10.
- The paper was presented at the 2018 EFA conference in Warsaw.
Abstract: We show that pass-through funding of mortgages with covered bonds supported by strong creditor rights is one way of providing highly liquid mortgage bonds. Despite a 30% drop in house prices during the 2008 crisis, these mortgage bonds remained as liquid as comparable government bonds with high trading volume and low bid-ask spreads. Market liquidity of these covered bonds is primarily driven by the availability of funding liquidity. Funding liquidity is the main concern because the pass-through funding approach effectively eliminates other types of risks from the investor’s perspective. Banking regulators should take into account the implications of these findings, particularly when it comes to the interplay between liquidity and capital requirements.
“The Cost of Immediacy for Corporate Bonds” (with Marco Rossi), 2019, Review of Financial Studies 32(1), page 1-41.
- The study was cited by Reuters as the main argument for changing EU regulation in favor of Danish covered bonds (March 13th, 2013).
- Lead case in the CBS publication “Samfundsrelevant forskning på CBS”, 2014.
Abstract: Liquidity provision for corporate bonds has become significantly more expensive after the 2008 crisis. Using index exclusions as a natural experiment during which uninformed index trackers request immediacy, we find that the cost of immediacy has more than doubled. In addition, the supply of immediacy has become more elastic with respect to its price. Consistent with a stringent regulatory environment incentivizing smaller dealer inventories, we also find that dealers revert deviations from their target inventory more quickly after the crisis. Finally, we investigate the pricing impact of information, changes in ownership structure, and differences between bank and non-bank dealers.
“Corporate Bond Liquidity Before and After the Onset of the Subprime Crisis” (with Peter Feldhutter and David Lando), 2012, Journal of Financial Economics, 103, 471-492.
- RFS Lead article and Editor's choice.
- The study and results were discussed by Matt Levine in the Bloomberg blog, Money Stuff (Oct 10th, 2016).
Abstract: We analyze liquidity components of corporate bond spreads during 2005–2009 using a new robust illiquidity measure. The spread contribution from illiquidity increases dramatically with the onset of the subprime crisis. The increase is slow and persistent for investment grade bonds while the effect is stronger but more short-lived for speculative grade bonds. Bonds become less liquid when financial distress hits a lead underwriter and the liquidity of bonds issued by financial firms dries up under crises. During the subprime crisis, flight-to-quality is confined to AAA-rated bonds.
“Liquidity biases in TRACE”, 2009, Journal of Fixed Income, 19, 43-55.
- The study and our results are discussed in New York Times (Jan 19th, 2012) and Financial Times (Feb 2012).
- Our results are used in a SIFMA study done by Oliver Wyman on the impact of the Volcker Rule on corporate bond liquidity.
- The Lambda market illiquidity measure (updated upon request) can be downloaded from feldhutter.com.
Abstract: The transactions database TRACE is rapidly becoming the standard data source for empirical research on US corporate bonds. This paper is the first to thoroughly discuss the assumptions needed to clean the disseminated TRACE data and to suggest that different filters should be used depending upon the application. 7.7% of all reports in TRACE are errors and in some cases up to 18% of the reports should be deleted. Failing to correct for these errors will bias popular liquidity measures towards a more liquid market. The median bias for the daily turnover will be 7.4% and for a quarter of the bonds the Amihud price impact measure will be underestimated by at least 14.6%. Further, calculating these two measures on the same data sample would potentially bias one of them.
"Corporate Bonds" (with David Lando), 2016, In Handbook of Fixed-Income Securities, Pietro Veronesi (ed.), ch. 22, 541-560, Wiley.
- The filter forms the basis of the WRDS bond returns dataset provided by WRDS.
- WRDS supplies official filters for cleaning TRACE which are directly adapted from this study.
- An introduction and overview of corporate bond modeling.
Last updated by: Jens Dick-Nielsen 22/10/2021