Papers

Do Investment Banks Matter for M&A Returns? (with Alex Edmans)
Previously circulated as:
How Should Acquirers Select Advisors? Persistence in Investment Bank Performance
Do Investment Banks Have Skill? Performance Persistence of M&A Advisors
[Online Appendix] [Mergers between Investment Banks]
Review of Financial Studies, forthcoming

The Illiquidity of Corporate Bonds (with Jun Pan and Jiang Wang)
Previously circulated as: Liquidity of Corporate Bonds
Journal of Finance, forthcoming

Working Papers

Structural Models of Default and the Cross-Section of Corporate Bond Yield Spreads Under Revision
Abstract: This paper tests the ability of structural models of default to price corporate bonds in the cross-section. I find that the Black-Cox model can explain 45% of the cross-sectional variation in observed yield spreads. The unexplained variation cannot be attributed solely to non-credit components. Specifically, unexplained yield spreads are related to credit risk proxies such as recent equity volatility, ratings, and option expensiveness, suggesting that the model does not fully capture credit risk in the cross-section. Further suggesting that the Black-Cox model does not fully capture credit risk in the cross-section, I find that unexplained yield spreads are related to unexplained CDS spreads. Based on the relation of unexplained yield spreads with option expensiveness and recent equity volatility, I then calibrate a jump diffusion model and a stochastic volatility model, finding that the jump diffusion model weakly improves cross-sectional explanatory power while the stochastic volatility model does not. As the jump diffusion model relies on jump risk premia estimates from equity options, this suggests that the corporate bond and equity option markets price a common risk. However, much of the cross-sectional variation in yield spreads remains unexplained by structural models.

Excess Volatility of Corporate Bonds (with Jun Pan)
Abstract: This paper examines the connection between the return volatilities of corporate bonds, equities, and Treasuries under the Merton model with stochastic interest rates. Constructing empirical volatilities using bond returns over daily, weekly, and monthly horizons, we find that empirical bond volatilities are too high to be explained by equity and Treasury volatilities. Furthermore, the results are robust to using credit default swaps rather than corporate bonds to measure volatility in the credit market. At the daily return horizon, the excess volatility of corporate bonds is related to known liquidity proxies. However, this relation disappears at the monthly horizon even though corporate bonds continue to be excessively volatile. Thus, there appears to be a disconnect between corporate bonds and equities that goes beyond the illiquidity of corporate bonds.

Book Chapter
Options (with Alex Edmans), Ch. 17 in Stigum's Money Market 4E, McGraw-Hill

My SSRN Page