tailieunhanh - Stocks, Bonds and the Investment Horizon: A Spatial Dominance Approach

This paper examines the informational efficiency of loans relative to bonds using a unique dataset of daily secondary market prices of loans. We find that the loan market is informationally more efficient than the bond market prior to and surrounding infor- mation intensive events, such as corporate (loan and bond) defaults, and bankruptcies. Specifically, we find that loan prices fall more than bond prices prior to an event, and less than bond prices of the same borrower during a short time period surrounding an event. This evidence is consistent with a monitoring advantage of loans over bonds. Our results are robust to a different empirical methodology (Vector. | Banco de Mexico Documentos de Investigacion Banco de Mexico Working Papers N 2011-03 Stocks Bonds and the Investment Horizon A Spatial Dominance Approach Raul Ibarra-Ramirez Banco de Mexico June 2011 La serie de Documentos de Investigacion del Banco de Mexico divulga resultados preliminares de trabajos de investigación económica realizados en el Banco de Mexico con la finalidad de propiciar el intercambio y debate de ideas. El contenido de los Documentos de Investigación asi como las conclusiones que de ellos se derivan son responsabilidad exclusiva de los autores y no reflejan necesariamente las del Banco de Móexico. The Working Papers series of Banco de Mexico disseminates preliminary results of economic research conducted at Banco de Mexico in order to promote the exchange and debate of ideas. The views and conclusions presented in the Working Papers are exclusively of the authors and do not necessarily reflect those of Banco de Mexico. Documento de Investigación 2011-03 Working Paper 2011-03 Stocks Bonds and the Investment Horizon A Spatial Dominance Approach Raul Ibarra-Ramirez Banco de Mexico Abstract Financial advisors typically recommend that a long-term investor should hold a higher percentage of his wealth in stocks than a short-term investor. However part of the academic literature disagrees with this advice. We use a spatial dominance test which is suited for comparing alternative investments when their distributions are time-varying. Using daily data for the US from 1965 to 2008 we test for dominance of cumulative returns series for stocks versus bonds at different investment horizons from one to ten years. We find that bonds second order spatially dominate stocks for one and two year horizons. For horizons of nine years or longer we find evidence that stocks dominate bonds. When different portfolios of stocks and bonds are compared we find that for long investment horizons only those portfolios with a sufficiently high proportion of stocks are .