Posts Tagged ‘business objectives’
Tuesday, March 16th, 2010
We discussed methods for estimating the information content of trades and the effect of inventory control on prices. The models that we discussed generally assume that only one of the effects (information or inventory control) is present. However, the empirical predictions of the asymmetric information and inventory control market microstructure models are very similar. Both theories predict that prices will move in the direction of the trade: a buyer-initiated order increases bid and ask prices, whereas a seller-initiated trade decreases bid and ask prices. This makes it difficult to distinguish the two theories empirically, unless good data on inventories are available. However, this is rarely the case.
Fortunately, in the absence of inventory data there is another way to separate information effects from inventory effects. Theoretically, information effects arise because trades reflect new information. This information will be incorporated in the price. If the market is efficient, the impact will be immediate and permanent. In contrast, inventory effects arise due to liquidity providers’ inventory imbalances. If the liquidity providers actively manage their inventory, these imbalances will be temporary. As a direct consequence, the price effect of trades will also be temporary and will reverse in the future. This gives a handle to distinguish information from inventory control effects:
information has permanent price effects whereas inventory effects are transitory.
Tags: business objectives, cash reserves, debt consolidation, investment opportunities, loans guide, money guide, refinancing
Posted in business strategy, campaigns, cash demand, companies, credit cards | Comments Off
Wednesday, November 11th, 2009
A correlation between total returns of high yield and treasury bonds shows that interest rate risk can certainly not be neglected by high-yield investors. The mid-1990s serve as a good example. High yield and treasury returns had a quite high correlation in an environment of low default rates and tight credit spreads. In 2003 an increased correlation could be observed again when spreads were approaching historical lows and default rates were falling.
High-yield sensitivity to interest rates is a function of credit risk. This means that the high-yield upper tier (BB/BB) segment’s correlation to 10-year treasuries is higher than for lower tier credit (B and below). Duration management in high-yield portfolios will have a positive performance contribution. Particularly crossover credits and BB’s total returns will be also determined by the movements of interest rates.
During times of low default rates, historically tight spreads and low interest rates it is worthwhile to analyze the duration contribution of various sectors to the high-yield index. In a scenario of rising interest rates, sectors with tight spreads and a high average duration should be watched closely due to a high underperformance potential.
Tags: business competition, business objectives, cash reserves, CEO, investment opportunities, loans guide, merger, money guide, pricing policy, shareholders, shares
Posted in accounting, attitude, banking, budget analysis, business goals, business patterns, business publications | Comments Off
Friday, October 30th, 2009
Whenever the equity risk premium falls below current spread levels, there is a quasi-arbitrage opportunity between corporate bonds and equities. After a long period with a positive equity credit premium, the picture changed in 1999, signaling the height of the equity bubble. The interpretation of this was that expected returns on corporate bonds versus equities were extremely attractive. While corporate bonds actually outperformed equities by far between 2000 and 2002, those years were characterized by a massive widening of credit spreads. Due to the bursting of the tech bubble and the credit spread tightening since fall 2002, the gap has closed.
Tags: bad debt, business objectives, car loans, compare credit, currency trading, debt consolidation, debt settlement, forex, funds, home equity, investment opportunities, loans guide, portfolio, refinancing
Posted in budget analysis, business goals, finances, financial principles, financial risks, loans, management, merchandise | Comments Off
Thursday, October 29th, 2009
One approach to identify relative value between the above-mentioned asset classes is to compare risk premia. For corporate bonds this is equivalent to the spread over government bonds. The comparison versus equities requires the estimation of the equity risk premium, that is the difference between the expected rate of return on the stock market and a risk-free interest rate, usually long-term government bond yields. While there are differences in the sector structure of the equity and corporate bond markets, for example with respect to technology exposure, the equity credit premium may nevertheless provide valuable insights into the relative valuation of both markets. This is because risk factors such as economic growth, risk aversion and implied equity volatility influence both markets in a similar manner.
Tags: business competition, business objectives, cash reserves, CEO, loans guide, merger, money guide, pricing policy, shareholders, shares
Posted in banking, business patterns, campaigns, credit cards, developers, equity, finances, financial risks | Comments Off