We propose a machine learning methodology for predicting the future liquidity distribution of individual bonds in the U.S. corporate bond market and use it to compute two forward-looking illiquidity measures: expected illiquidity and expected tail illiquidity as measure for downside liquidity risk. We find that bonds characterized by higher expected illiquidity have elevated systematic risk premiums, whereas expected tail illiquidity is predominantly reflected in the alpha. Investors in corporate bond funds preemptively sell their shares in response to anticipated liquidity declines in underperforming funds. All effects are much stronger compared to the standard approach of using today’s realized liquidity.
We argue that media slant constitutes a source of ambiguity and show that the uncertainty stemming from slanted news is priced in the cross section of US stocks. Our identification of slanted news stocks is based on a combination of a news proxy using Wikipedia page view data and mutual fund managers' aggregated portfolio positions. We find that slanted news stocks earn a premium of roughly 1\% in announcement months over their unslanted peers, which peaks on the announcement day itself. Our results further show that the premium is compensating for the exposure to a slanted news mimicking factor.
We develop a model in which mutual fund investors chase CAPM alpha. Managers can generate CAPM alpha either by discovering mispricing, **True Alpha**, or by loading on risk factors that are beyond the scope of the CAPM, **Fake Alpha**,. Investors cannot distinguish between the two different types of alpha and thus confuse Fake Alpha with True Alpha. We show that this confusion ex-post causes negative CAPM alpha in equilibrium states. Empirical results support our theoretical predictions. The average CAPM alpha is significantly negative, and retail funds with large loads of Fake Alpha provide investors significantly lower CAPM alpha than their peers.
What determines the recovery of sovereign bond holders in the face of a credit event? This paper studies empirical determinants for sovereign recovery risk. Guided by theoretically backed hypotheses we use a sample of 102 past restructurings and empirically test the relation between haircut sizes and their economic drivers. We find a significant linkage of the haircut size to a debtor's ability to repay as well as his willingness. Distinguishing between excusable and strategic defaulters in a new way enables us to empirically show that punishment is of markedly increased effectiveness amongst the strategic cohort. Based on these results we develop a forecasting-model for predicting haircuts conditional on the restructurings taking place within the year ahead and assess the performance of the model by applying it to a sample of the 45 restructurings observed from 1991 to present.