One of the most important findings in empirical finance has been the fact that returns are not independent neither identically distributed over time. This fact means that there is time variation in the conditional distribution of returns and it is called predictability. Its economic meaning is that the investor faces time-varying investment opportunities. This concept was introduced by Merton (1973), who developed the Intertemporal CAPM to describe the implications of predictability for portfolio choice and asset pricing.
In terms of portfolio management, predictability implies additional terms in the optimal portfolio of an investor with respect to the usual ones of risk-return trade-off. These terms are called hedging demands as they are driven by the correlation between shocks to the returns and shocks to the state variables. This portfolio choice has implications in terms of asset pricing. The market portfolio is no longer the only priced risk factor and a multifactor model should be used for pricing.
This paper examines the relation between momentum in equities and corporate bonds. The market for corporate bonds is large, both in size and breadth; indeed, at the of end of 1996, according to the Lehman Fixed Income Database (LIFB), there were more than 1,500 investment grade bonds (rating of BBB or higher) trading with an aggregate face value exceeding 250 billion dollars. Yet, there are relatively few studies examining the cross-sectional predictability of returns in the corporate bond market.
Homeowners facing foreclosure have always been vulnerable to scammers, conartists, and thieves. When property values were appreciating rapidly, foreclosure rescue scams primarily focused on obtaining title to the home and robbing homeowners of their equity. Today with property prices depreciating and many homes already “underwater,” equity is no longer the game.
Instead, rescuers have become high-volume, “loan modification specialists.” The pitch by this new breed of predators is that, for a fee, which can reach several thousand dollars, they will negotiate a loan modification for a financially distressed borrower. The hitch is that the “work” performed, if any, leads nowhere, with the homeowner out money and time and closer than ever to foreclosure.
