اثر نوسانات نرخ بهره و نوسانات سهام در گسترش بازدهی اوراق قرضه شرکت های بزرگ : مقایسه غیر قابل فراخوانی ها و قابل فراخوانی ها

This research investigates the impact of interest rate volatility upon corporate bond yield spreads. We first consider the impact of interest rate volatility upon noncallable bond spreads. Because greater interest rate volatility likely increases the volatility of the firm's debt, we hypothesize that the relation will be positive. Given that we do find a positive relation, we thus investigate whether the positive effect of interest rate volatility on yield spreads is stronger or weaker for callable bonds. We find that the effect is weaker for callable bonds. This result indicates that there is a negative relation between default spreads and call spreads, which is consistent with the theory of Acharya and Carpenter (2002), but in contrast to the theory of King (2002). Furthermore, our results for the relationship between equity volatility and yield spread tend to support Acharya and Carpenter (2002) more than King (2002).

The volatility of interest rates plays numerous important roles in finance theory and practice. Sophisticated ways to measure exposure to interest rate volatility such as value at risk (VAR) have been developed. The potential for significant adverse changes in interest rates has caused banks, insurance companies, mutual funds and other financial institutions to devise strategies, such as immunization, to protect their fixed income portfolios. As described below, we answer important questions regarding the impact of interest rate volatility upon yield spreads. Our answers are useful for bond investment strategies intended to enhance returns and strategies to hedge portfolio value. Alternative theories of how interest rate volatility affects default-free bond pricing have been developed by numerous authors. For example, default free bond pricing theory typically includes interest rate volatility as an important factor where a stochastic process for continuous changes in the short rate is given in terms of a drift term and a volatility term. Continuous changes in bond prices are derived from the short rate process. Veronesi (2010) and others derive expected default-free bond returns as a function of interest rate volatility. In a classic article, Heath et al. (1990) derive a bond pricing model where the drift in the short (forward) rate is, in fact, a function of the volatility of short rates. Empirical estimations of interest rate volatility have investigated alternative specifications of default-free short rate volatility. For example, classic interest rate theories of Merton (1973)1 and Vasicek (1977) suggest that short rate volatility is independent of the level of interest rates while, in contrast, later models such as Cox et al. (1985), Black and Karasinski (1991), and Pearson and Sun (1994) maintain that the volatility of interest rates depends on the level of interest rates. Brenner et al. (1996) have found evidence that volatility depends on the level of rates and, also, GARCH processes. Like interest rate volatility, yield spreads have similarly played numerous important roles in finance theory and practice. For example, the spread between long and short rates has been of great interest where some think that this spread predicts economic growth. More relevant to this research, the yield spread between instruments of equal maturity is also a topic of great importance. If one considers two equal maturity corporate debt instruments, what is the market determined yield spread and what underlying features determine this spread? Perhaps the most obvious factor is any differential in credit quality (default risk). Recently, the importance of other factors has also been stressed. Duffee (1998), in testing the Longstaff and Schwartz (1995) model on both callable and noncallable bonds, found that a greater level of interest rates suggests a stronger growth in firm value and thus reduces the spread over U.S. Treasury bonds. Elton et al. (2001) find that expected default explains a smaller part of spreads than commonly assumed. Chen et al. (2007) find that default risk does not fully explain spreads and stress that liquidity explains a large part of corporate bond spreads. Bao et al. (2011) find that liquidity is a determinant of spreads. (Although Lin et al. (2011) do not address yield spreads, they do find that liquidity is an important determinant of expected bond returns.) However, these papers have not addressed the impact of interest rate volatility on yield spreads. The purpose of this research is to investigate the effect of both interest rate volatility and equity volatility on corporate yield spreads for both noncallable and callable bonds. Specifically, interest rate volatility is defined as the standard deviation of the daily one-month Treasury constant maturity rate for the 12 months prior to the bond transaction date.2 We answer two important and broad questions: 1) How does interest rate volatility affect the yield spread for noncallable corporate bonds?; 2) How do the effects of interest rate volatility and equity volatility on yield spreads differ for noncallable corporate bonds versus callable corporate bonds? While some bond pricing theories suggest that interest rate volatility should be priced in corporate yield spreads, surprisingly, there is no empirical work testing the effect of interest rate volatility on the above types of yield spreads. Our research is useful for those bond portfolio managers attempting to enhance returns and, also, those attempting to hedge portfolio value. With respect to return enhancement, consider our finding that interest rate volatility is, in fact, priced into the spreads between U.S. Treasury bonds and corporate bonds. Given our finding and the predictability of interest rate volatility documented by, among others, Brenner et al. (1996) and Poon and Granger (2003), one could develop strategies for the optimal mix of U.S. Treasury and corporate bonds. As one example, if interest rate volatility is predicted to increase, the spread will also tend to increase. Thus, a portfolio manager should then likely reduce holdings of corporate bonds relative to Treasuries. With respect to hedging, note that corporate bond hedging strategies frequently consider yield changes relative to Treasury yield changes.3 Our findings suggest that corporate bond yield changes, relative to Treasury yield changes, are dependent upon interest rate volatility. Hedging strategies that incorporate this finding should provide improved hedging performance. We first investigate the effect of interest rate volatility on yield spreads of noncallable bonds. Merton (1974) relates a firm's default risk to the firm's total asset volatility. Many studies have considered a firm's equity volatility in the investigation of the yield spread of its bonds by assuming that a firm's (total) asset volatility is determined by its equity volatility. However, as noted by Campbell and Taksler (2003), the asset volatility of a firm with risky debt is determined by both its equity and debt. For example, if a firm has a high level of interest rate volatility and therefore a likely high level of debt volatility, the firm is more likely to reach a critical value for default, thereby resulting in a high probability of default. Thus, interest rate volatility should be priced in corporate yield spreads. Acharya and Carpenter (2002) also provide theoretical support for the positive effect of interest rate volatility on noncallable bond spreads. Assuming that the firm has a single bond outstanding, they model a defaultable bond where its spread increases with the volatility of the difference between the host bond price and the firm value. The host bond is a coupon paying bond with no default risk and no call risk. The details of their model are given in the theory and hypotheses section. We also investigate whether the effect of interest rate volatility on yield spreads is greater or smaller for callable bonds than for noncallable bonds. Since interest rate volatility affects both the firm's option to default and refunding call option values, the effect of interest rate volatility on yield spreads is complex. We note that default and (refunding) call options are interactive because, for example, a bond default, which may be more likely when interest rate volatility is high, makes the call option value disappear. That is, call option value declines with interest rate volatility. As a result, the effect of increasing interest rate volatility on total yield spreads may be smaller for callable bonds than for noncallable bonds. On the other hand, interest rate volatility may increase call option values because greater interest rate volatility logically increases the volatility of the underlying instrument and thus increases the likelihood that the bond price reaches the call price. That is, a call option value may rise with interest rate volatility. Thus, the impact of interest rate volatility on the spread may be larger for callable bonds compared to noncallable. In sum, the differential effect of interest rate volatility on yield spreads for callable bonds is not immediately obvious and alternative theories suggest alternative (positive and negative) effects. It is important to understand the importance of callable corporate yield spreads. Even though most empirical studies exclude callable bonds from their sample, Berndt (2004) reports that as of April, 2003, roughly 60% of U.S. corporate bonds in the Fixed Income Securities Database (FISD) are callable. Acharya and Carpenter (2002) point out that practitioners generally quote corporate bond prices as yield spreads and most corporate bonds are callable. Therefore, our empirical work includes yield spreads of callable corporate bonds. We find that interest rate volatility clearly has a strong impact upon noncallable bond spreads after controlling for common bond-level, firm-level, and macroeconomic variables. This result is robust to using individual issuers' fixed effects and differencing the time-series of variables. However, we find that this positive effect of interest rate volatility on yield spreads is smaller for callable bonds than for noncallable bonds. As we later explain, this result indicates that an increase in default risk reduces call option values, which is consistent with that of Kim et al. (1993), and Acharya and Carpenter (2002) but is not consistent with that of King (2002). Also, our results for the impact of equity volatility on yield spreads are more consistent with those of Acharya and Carpenter (2002) than that of King (2002). Finally, we find that the average yield spread on callable bonds tends to be greater than that on noncallable bonds, supporting the existence of positive call spreads. This is in contrast to Bao et al. (2011), who include callable bonds in their regressions of yield spreads, but find either negative or insignificant call spreads.4 Section one explains the theory of how interest rate volatility may affect spreads and also presents our hypotheses. The following section describes the data used and control variable selection. Then we present the empirical results. The final section concludes and summarizes the research.

This research examines the impact of interest rate volatility and equity volatility on yield spreads for noncallable and then, also, callable bonds. Given that the total firm volatility also includes the volatility of a firm's bonds, interest rate volatility should affect default risk. The greater the interest rate volatility, the more volatile the price of a bond. As the bond price becomes more volatile, the volatility of firm asset market value increases, thereby leading to an increase in default spread. We find that interest rate volatility is positively related to yield spreads on noncallable bonds. We find that the relationship between interest rate volatility and yield spreads is more strongly positive for junk bonds than for investment grade bonds. Investment grade bonds are unlikely to default, as pointed out by Campbell and Taksler (2003) and, as a consequence, the positive effect of interest rate volatility on the default spread should be more significant for junk bonds. In addition, we find that the average yield spread on callable bonds is greater than that on noncallable bonds, indicating that the embedded options in callable bonds are priced. We also investigate whether the effect of interest rate volatility on yield spreads is greater or smaller for callable bonds than for noncallable bonds. Two conflicting theories predict different effects of interest rate volatility on yield spreads on callable bonds versus noncallable bonds. Acharya and Carpenter (2002) suggest that default (refunding call) risk destroys refunding call (default) option values. An increase in default risk, driven by an increase in interest rate volatility, should reduce the call spread, thereby offsetting the positive effect of interest rate volatility on the default spread. On the other hand, interest rate volatility might increase call spreads by inducing a higher price volatility of callable bonds, which is consistent with the findings of King (2002) that a bond with weaker credit quality has greater call option value. We find that the effect of interest rate volatility on yield spreads is smaller for callable bonds than for noncallable bonds. Finally, our results for the impact of equity volatility upon callable bond spreads support the theory of Acharya and Carpenter (2002) more than that of King (2002).