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Contrary to existing literature, we establish that two factors, dollar and carry, suffice to explain a large cross-section of currency returns with R2s exceeding 80%. Our paper highlights the importance of accounting for time-variation in conditional moments. Unconditional estimations that ignore this time-variation mistakenly reject the two factor model. We... [+]

Contrary to existing literature, we establish that two factors, dollar and carry, suffice to explain a large cross-section of currency returns with R2s exceeding 80%. Our paper highlights the importance of accounting for time-variation in conditional moments. Unconditional estimations that ignore this time-variation mistakenly reject the two factor model. We propose a parsimonious framework to estimate conditional currency factor models and provide testable restrictions. Our findings imply that currency markets are well described by a model in which (i) each country-specific SDF loads on one country-specific-dollar-and one global-carry-shock, and (ii) risk loadings are time-varying. Other risk factors proposed in the literature are useful to describe the time variation in dollar and carry factor risk premia. in conditional moments of DOL and CAR and conditional factor loadings. [-]

We find that the lower the corporate bond minimum daily returns in the previous month, the higher the subsequent month’s excess returns in the cross-section. The annualized differences in one-month holding returns between the lowest and the highest minimum daily returns deciles are 6.24% and 6% for equal-weighted and value-weighted... [+]

We find that the lower the corporate bond minimum daily returns in the previous month, the higher the subsequent month’s excess returns in the cross-section. The annualized differences in one-month holding returns between the lowest and the highest minimum daily returns deciles are 6.24% and 6% for equal-weighted and value-weighted portfolios, respectively. This return predictability is stronger when the minimum daily return occurs on days closer to the month-end, suggesting that investors overextrapolate the extremely negative daily returns in corporate bond pricing. The return predictability is robust to controlling for other bond characteristics including, illiquidity, downside risk, idiosyncratic volatility, etc. [-]

This study shows that firm managers depend on bond price information for capital investment decisions. The managerial dependence on the bond markets is negatively responsive to bond fund institutional sell-herding, which reflects non-fundamental price changes in firms. This learning channel complements the equity-based learning process, providing additional evidence for the... [+]

This study shows that firm managers depend on bond price information for capital investment decisions. The managerial dependence on the bond markets is negatively responsive to bond fund institutional sell-herding, which reflects non-fundamental price changes in firms. This learning channel complements the equity-based learning process, providing additional evidence for the predictive power of bond prices in explaining investment behavior. The bond learning effect is stronger in firms with shorter bond maturities, lower credit ratings, and those at greater risk of default, highlighting how corporate bond prices inform managers about their firms’ default risk. [-]

This study shows that firm managers learn from politically misaligned investors. Learning is stronger during periods of high policy uncertainty, high partisan conflict, and when investor ownership is more concentrated. Managers particularly seek information on policy and regulatory implications for firm prospects. Green policy illustrates this mechanism: Democratic firms rely... [+]

This study shows that firm managers learn from politically misaligned investors. Learning is stronger during periods of high policy uncertainty, high partisan conflict, and when investor ownership is more concentrated. Managers particularly seek information on policy and regulatory implications for firm prospects. Green policy illustrates this mechanism: Democratic firms rely more on Republican investors to guide their green innovation under an uncertain policy environment. Ultimately, this paper shows that the documented partisan bias is limited for firm managers, as they still learn useful incremental information from politically misaligned investors. [-]

We document a novel salience effect in the US corporate bond market. We find that bonds with lower salience theory (ST) value have higher returns in the subsequent month. The annualized differences in one-month holding excess returns between the lowest and highest ST deciles are 3.84% and 4.44% for equal-weighted... [+]

We document a novel salience effect in the US corporate bond market. We find that bonds with lower salience theory (ST) value have higher returns in the subsequent month. The annualized differences in one-month holding excess returns between the lowest and highest ST deciles are 3.84% and 4.44% for equal-weighted and value-weighted portfolios. However, the salience effect is only exhibited in the most salient downside returns. These results indicate that corporate bond investors overweight salient negative returns when forming their expectations of future returns. Consequently, bonds with salient downside returns are undervalued and yield higher returns in the subsequent month. [-]