City Research Online

Abstract

This thesis explores the fundamental role of pricing models in valuing securities within capital markets. It introduces the Popularity Asset Pricing Model (PAPM), a novel and generalized framework that builds on existing models like Capital Asset Pricing Model (CAPM), and Arbitrage Pricing Theory (APT) but addresses their restrictive and unrealistic assumptions. PAPM emphasizes the concept of popularity, which encapsulates preferences or tastes for certain characteristics, and how this influences asset pricing. By applying popularity to credit instruments, the thesis explains premiums and market anomalies through a framework where popularity affects the demand curve and, consequently, the premiums. This research demonstrates that time-varying risk premia are significantly influenced by market activity and financial risks, aligning with investor preferences. These preferences are in the form of risk and nonrisk characteristics of the asset being priced. The thesis bridges classical and behavioral finance by investigating how various preferences impact a company’s credit risk premium, as measured by the credit default swap (CDS) spread.

In the first paper, I have examined the fundamental research question concerning the preferences of macroeconomic variables on corporate credit risk premiums and, therefore, returns. I applied the SBBI dataset, a set of macroeconomic risk premiums to the popularity framework to illustrate the effect of their popularity as the drivers of corporate credit returns via the changes in CDS spreads.

In the second paper, I explored the research question concerned with the preferences of ESG scores, resulting in a relationship between corporate credit returns and equity returns of the same capital structure. Specifically, I investigated how popularity relates to socially responsible or ESG (environmental, social, and governance) investing. The popularity of companies with favorable ESG rankings increases the demand for their bonds, driving prices higher. The reverse is true of "sin" firms with low ESG scores. Predictably, the result is that companies with low ESG scores outperform those with high ESG scores.

The third paper examined the research question of whether the preference for ESG scores, within the theoretical framework of PAPM, impacts credit portfolios’ tail risk (expected shortfall). Thus, I investigate how the popularity of ESG and its pillars impact the tail risk of credit portfolios. It turns out that in the short-term (i.e., via expected loss), there is no impact on the popularity of ESG; there is a strong positive relation between the popularity of ESG score and the tail-risk (defined as expected shortfall).

Publication Type:	Thesis (Doctoral)
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School > Bayes Business School Doctoral Theses Doctoral Theses

Export

Downloads