Hostname: page-component-76fb5796d-r6qrq Total loading time: 0 Render date: 2024-04-27T03:00:46.479Z Has data issue: false hasContentIssue false
  • English
  • Français

Applying the Market Model to Long-Term Corporate Bonds

Published online by Cambridge University Press:  06 April 2009

Gordon J. Alexander
Get access Rights & Permissions [Opens in a new window]

Extract

Recently the standard market model has been used to examine holding period returns of corporate bonds. These studies have involved issues such as: the impact of accounting earnings data on bond price behavior [5]; the relationship of bond betas and ratings [19, 21]; the effect of ratings changes on bond prices [27]; the relationship of bond betas to duration and yield [3, 13, 15]; bond performance of bankrupt and nonbankrupt firms [26]; and tests of the Capital Asset Pricing Model based on bond returns [7]. While the empirical appropriateness of applying the market model to common stock returns has been demonstrated, similar tests have not been conducted with regard to long-term corporate bonds. Section II of this paper will examine the assumptions of the normal error regression model when used in the form of the market model and applied to a sample of long-term corporate bonds during the early years of their lives. The issue of systematic changes in the regression parameters will be addressed in Section III. Lastly, conclusions will be presented in Section IV.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 15 , Issue 5 , December 1980 , pp. 1063 - 1080
Copyright
Copyright © School of Business Administration, University of Washington 1980

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

[1]Blume, Marshall E. “Betas and Their Regression Tendencies.” Journal of Finance, Vol. 30, No. 3 (06 1975), pp. 785–795.CrossRefGoogle Scholar
[2]Blume, Marshall E. “On the Assessment of Risk.” Journal of Finance, Vol. 26, No. 1 (03 1971), pp. 1–10.Google Scholar
[3]Boquist, John A.; Racette, George A.; and Schlarbaum, Gary G.. “Duration and Risk Assessment for Bonds and Common Stocks.” Journal of Finance, Vol. 30, No. 5 (12 1975), pp. 1360–1365.CrossRefGoogle Scholar
[4]Brown, R. L.; Durbin, J.; and Evans, J. M.. “Techniques for Testing the Constancy of Regression Relationships over Time.” Journal of the Royal Statistical Society, Vol. 27 (1975), pp. 149–192.Google Scholar
[5]Davis, Darrel W.; Boatsman, James R.; and Baskin, Elba F.. “On Generalizing Stock Market Research to a Broader Class of Markets.” The Accounting Review, Vol. 53, No. 1 (01 1978), pp. 1–10.Google Scholar
[6]Fama, Eugene F.Foundations of Finance, 1st ed.New York: Basic Books, Inc. (1977).Google Scholar
[7]Friend, Irwin; Westerfield, Randolph; and Granito, Michael. “New Evidence on the Capital Asset Pricing Model.” Journal of Finance, Vol. 33, No. 3 (06 1978), pp. 903–917.CrossRefGoogle Scholar
[8]Galai, D., and Masulis, R. W.. “The Option Pricing Model and the Risk Factor of Stock.” Journal of Financial Economics, Vol. 3, Nos. 1/2 (01/03 1976), pp. 53–81.CrossRefGoogle Scholar
[9]Goldfeld, S. M., and Quandt, R. E.. “Some Texts for Homoscedasticity.” Journal of the American Statistical Association, Vol. 60 (1965), pp. 539–547.CrossRefGoogle Scholar
[10]Hopewell, Michael H., and Kaufman, George G.. “Bond Price Volatility and Term to Maturity: A Generalized Respecification.” American Economic Review, Vol. 63, No. 4 (09 1973), pp. 749–753.Google Scholar
[11]Ibbotson, Roger G., and Sinquefield, Rex A.. Stocks, Bonds, Bills, and Inflation: The Past (1926–1976) and the Future (1977–2000), 1st ed.Charlottesville: The Financial Analysts Federation (1977).Google Scholar
[12]Jahankani, Ali, and Pinches, George E.. “The Nonstationarity of Systematic Risk for Bonds.” Working Paper No. 497, College of Commerce and Business Administration, University of Illinois at Urbana-Champaign (1978).Google Scholar
[13]Jarrow, Robert A. “The Relationship between Yield, Risk, and Return of Corporate Bonds.” Journal of Finance, Vol. 33, No. 4 (09 1978), pp. 1235–1240.CrossRefGoogle Scholar
[14]Johnston, J.Econometric Methods, 2nd ed.New York: McGraw-Hill, Inc. (1972).Google Scholar
[15]Livingston, Miles. “Duration and Risk Assessment for Bonds and Common Stocks: A Note.” Journal of Finance, Vol. 33, No. 1 (03 1978), pp. 293–295.Google Scholar
[16]Malkiel, Burton G.The Term Structure of Interest Rates, 1st ed.Princeton: Princeton University Press (1966).Google Scholar
[17]McCallum, John S. “The Expected Holding Period Return, Uncertainty and the Term Structure of Interest Rates.” Journal of Finance, Vol. 30, No. 2 (05 1975), pp. 307–323.Google Scholar
[18]Neter, John, and Wasserman, William. Applied Linear Statistical Models, 1st ed.Homewood: Richard D. Irwin, Inc. (1974).Google Scholar
[19]Percival, John. “Corporate Bonds in a Market Model Context.” Journal of Business Research, Vol. 2, No. 4 (10 1974), pp. 461–468.Google Scholar
[20]Pindyck, Robert S., and Rubinfeld, Daniel L.. Econometric Models and Economic Forecasts, 1st ed.New York: McGraw-Hill, Inc. (1976).Google Scholar
[21]Reilly, Frank K., and Joehnk, Michael D.. “The Association between Market-Determined Risk Measures for Bonds and Bond Ratings.” Journal of Finance, Vol. 31, No. 5 (12 1976), pp. 1387–1403.Google Scholar
[22]Roberts, Gordon S. “A Note on Duration and Systematic Risk for Bonds.” Paper presented at 1979 Western Finance Association Meetings.Google Scholar
[23]Roll, Richard. “Ambiguity When Performance Is Measured by the Securities Market Line.” Journal of Finance, Vol. 33, No. 4 (09 1978), pp. 1051–1069.CrossRefGoogle Scholar
[24]Roll, Richard “A Critique of the Asset Pricing Theory's Tests.” Journal of Financial Economics, Vol. 4, No. 2 (03 1977), pp. 129–176.CrossRefGoogle Scholar
[25]Ross, Stephen. “The Current Status of the Capital Asset Pricing Model.” Journal of Finance, Vol. 33, No. 3 (06 1978), pp. 885–901.CrossRefGoogle Scholar
[26]Warner, Jerold B. “Bankruptcy, Absolute Priority, and the Pricing of Risky Debt Claims.” Journal of Financial Economics, Vol. 4, No. 3 (05 1977), pp. 239–276.CrossRefGoogle Scholar
[27]Weinstein, Mark I. “The Effect of a Rating Change Announcement on Bond Price.” Journal of Financial Economics, Vol. 5, No. 3 (12 1977), pp. 329–350.Google Scholar
[28]Winkler, Robert L., and Hays, William L.. Statistics, 2nd ed.New York: Holt, Rinehart, and Winston, Inc. (1975).Google Scholar