CAFIN publishes three new working papers

November 16, 2017

The Center for Analytical Finance (CAFIN) added three new working papers to the website.

Adding to the center’s cutting-edge research is “Are Credit Rating Agencies Discredited? Measuring Market Price Effects from Agency Sovereign Debt Announcements” by Mahir Binici, Michael Hutchison, and Evan Weicheng Miao. This is the 45th paper the center has published. 

The abstract reads: “This paper investigates whether the price response to credit rating agency (CRA) announcements on sovereign bonds has diminished since the Global Financial Crisis (GFC). We characterize credit rating events more precisely than previous work, controlling agency announcements for the prior credit state – outlook, watch/review, or stable status as well as the level of the credit rating. Emphasizing the transition from one state to another allows us to distinguish between different types of announcements (rating changes, watch and outlook events) and their price effects. We employ an event study methodology and gauge market response by standardized cumulative abnormal returns and directional change statistics in daily credit default swap (CDS) spreads. We find that rating announcements provide a rich and varied set of information on how credit rating agencies influence market perceptions of sovereign default risk. However, we do not find evidence that markets have discounted the information value of these announcements since the GFC. Moreover, we find that accurate measurement of these effects depends on conditioning for the prior credit state of the sovereign bond.

The working paper can be downloaded here.

“Industrial Specialization Matters: A New Angle on Equity Home Bias” by Chenyue Hu is the 46th paper the center has published.

The abstract reads: “This paper theoretically and empirically examines how industrial structure affects equity home bias. I embed portfolio choice in a multi-country, multi-sector Eaton-Kortum model in order to explore how sectoral productivity differences affect a country's risk exposure and hence influence home bias. The model predicts that investors from highly specialized economies who want to hedge their risk have a strong incentive to avoid domestic assets. I confirm the prediction with the data by finding that home bias is negatively correlated with a country's degree of industrial specialization. This finding unveils the interaction between intranational risk hedging across sectors and international risk hedging across countries.”

The working paper can be downloaded here.

“Industry-Level Home Bias” by Chenyue Hu is the 47th paper the center has published.

The abstract reads: “This paper examines the home bias phenomenon in international finance at the industry level. Using unique financial datasets, I calculate the sectoral home bias of 27 industries in 43 countries. The empirical findings include: (1) home bias is stronger when and where capital restrictions are greater, (2) nontradable sectors exhibit stronger home bias, and (3) home bias decreases in sectoral productivity, suggesting that investors show a stronger preference for domestic assets of less productive sectors. To rationalize this empirical finding, I build a model with a multi-sectoral setting to shed light on the implications of industrial structure for international portfolio choice.”

The working paper can be downloaded here.