New PDF release: Investing in Corporate Bonds and Credit Risk

By Frank Hagenstein;Alexander Mertz;Jan Seifert

ISBN-10: 0230523293

ISBN-13: 9780230523296

ISBN-10: 1349517305

ISBN-13: 9781349517305

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Sample text

In recessions, conversely, the labor sector as well as the corporate sector suffers. The problems of the corporate sector become evident by a declining ratio of profits to GDP. Hence, corporate profitability and thus the companies’ abilities to generate cash flows to service their liabilities are highly cyclical. 8 illustrates that the cyclical nature of corporate profits and cash flows explains variations in corporate bond spreads extremely well. In our view the most objective measure for the ability of companies to service their liabilities is free cash flow.

11 INVESTMENT PROCESS Assuming that a portfolio manager acts in a way that is mean-variance efficient the value added, VA, is proportional to the information ratio squared. Expressed in terms of skill and breadth the portfolio manager’s ability to add value is IC2 ·N , 4␭R VA ϭ where ␭R represents the level of risk aversion. Consequently, to double his information ratio or the value added for a given level of active risk, the portfolio manager must double his skill, or quadruple the number of independent bets in the portfolio.

Historically, the corporate sector has benefited particularly during economic expansions. Not only did corporate profits grow in those periods, but also they increased faster than national income. This is reflected by a rising share of national income that usually goes to the bottom-line of the corporate sector during economic expansions. In other words, corporate profitability rises. In recessions, conversely, the labor sector as well as the corporate sector suffers. The problems of the corporate sector become evident by a declining ratio of profits to GDP.

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Investing in Corporate Bonds and Credit Risk by Frank Hagenstein;Alexander Mertz;Jan Seifert


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