Discussion of ‘‘Value investing in credit markets’’
Published online: 12 July 2012
Ó Springer Science+Business Media, LLC 2012
This discussion starts by describing what I like about the paper, then it expounds on
the ‘‘big picture’’ lessons I have drawn from it, and concludes with thoughts about
where this research may lead us.
This paper spans many areas—options theory, bankruptcy predictions, efﬁcient
markets, and investment theory—and sheds light on all of them. The paper
integrates accounting variables and options theory to arrive at superior bankruptcies
predictions, and then uses these predictions to test the efﬁciency of credit markets.
The paper makes several important contributions. It provides new methods for
bankruptcy predictions, it demonstrates the usefulness of credit spreads in these
predictions, it explores the efﬁciency of credit markets, and it conﬁrms the
usefulness of accounting information in investments in credit markets.
The paper’s main point is that credit markets are inefﬁcient and that apparently
investors fail to take full advantage of the information inherent in credit spreads.
The authors present several estimates of credit spreads that can predict future credit
spreads, thus opening the potential for above normal proﬁts. While not all the
estimates of credit spreads the authors present are equally useful in generating such
investments, it is remarkable that one need not use the most sophisticated (or
accurate) ones to produce such proﬁts.
This raises the questions: What is the source of this inefﬁciency, and why do
credit markets fail to incorporate the information inherent in credit spread
estimates? To answer these questions one may turn to some of the usual suspects:
that the market is efﬁcient but that the proﬁts are due to some un-priced risk (for
example liquidity, size, momentum), that transaction costs would wipe out all such
proﬁts, or that there are other missing variables in the analysis. Since the authors
went to great lengths to show that this is probably not the case, it seems that the
source of the inefﬁciency lies somewhere else. The risk factors considered in the
I. Venezia (&)
School of Business, Hebrew University, Mt. Scopus, Jerusalem 91905, Israel
Rev Account Stud (2012) 17:610–611