Credit Market Timing
Murray Z. Frank
University of Minnesota
Georgia Institute of Technology
May 11, 2010
In this paper we compare counterfactual corporate bond issuing dates to actual issuing dates in order to test the ability of firms to time the credit market. The 50 most active bond issuing financial firms and the 50 most active industrial firms are studied using one week, one month, and one quarter windows. The ability to time firm-specific CDS prices is studied from January 2002 - October 2009. The ability to time the risk-free rate (10 year US government bond) is studied from January 1988 - October 2009. We find that: firms do not successfully time the risk-free rate or the credit spreads. There is no evidence of CDS timing ability over one week or one month, but there is some borderline evidence at one quarter. For a typical bond issue, the firm loses about $1\%$ of the face value of the bond relative to a 1 month window, due to their inability to time the market. If the firms could improve their market timing, they could save many hundreds of millions of dollars. Since there is a degree of statistical predictability in the data, we find it surprising that these firms are not able to do a better job of timing the credit market.
Number of Pages in PDF File: 36
Keywords: Market Timing, Bonds, CDSworking papers series
Date posted: March 18, 2010 ; Last revised: May 12, 2010
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