• Modeling municipal yields with (and without) bond insurance

      Chun, A.L.; Namvar, E.; Ye, Xiaoxia; Yu, F. (2019-08)
      We develop an intensity-based model of municipal yields, making simultaneous use of the CDS premiums of the insurers and both insured and uninsured municipal bond transactions. We estimate the model individually for 61 municipal issuers by exploiting the dramatic decline in credit quality of the bond insurers from July 2007 to June 2008, and decompose the municipal yield spread based on the estimated parameters. The decomposition reveals a dominant role of the liquidity component as well as interactions between liquidity and default similar to those modeled by Chen et al. (2016) for corporate bonds. Towards the end of the sample period, our model also reproduces the "yield inversion" phenomenon documented by Bergstresser et al. (2010).
    • A Unified HJM Approach to Non-Markov Gaussian Dynamic Term Structure Models: International Evidence

      Li, H.; Ye, Xiaoxia; Yu, F. (2016-07-28)
      Motivated by an extensive literature showing that government bond yields exhibit a strong non-Markov property, in the sense that moving averages of long-lagged yields significantly improve the predictability of excess bond returns. We then develop a systematic approach of constructing non-Markov Gaussian dynamic term structure models (GDTSMs) under the Heath-Jarrow-Morton (HJM) framework. Compared to the current literature, our approach is more flexible and parsimonious, enabling us to estimate an economically significant non-Markov effect that helps predict excess bond returns both in-sample and out-of-sample.