This paper proposes two new Credit Default Swap (CDS) endogenous systematic factors constructed from peer-CDS information. The factors capture slow-moving credit risk information, as well as fast-moving newly arrived market information embedded in the most recent CDS quotes. Using a sample of U.S. non-financial listed firms from 2002 to 2011, we find that these two endogenous systematic factors dominate firm-specific factors and other widely known systematic factors in insample and out-of-sample CDS spread predictions.

This paper investigates the information content of aggregate hedge fund flow and its predictive power with respect to bond yields. Using a sample of 9,725 hedge funds from 1994 to 2012, we find that fund flow is negatively related to the changes in 10-year Treasury and Moody's Baa bond yields one month ahead. The relation is still pronounced after controlling for other determinants of yield changes, including the amount of arbitrage capital available in the economy, suggesting a non-trivial effect of flow-induced hedge fund trading on bond yields. Flow impact on corporate bonds is further amplified during periods of decreasing market liquidity, consistent with a fire-sale hypothesis. Hedge fund flow also predicts convergence between constant maturity swap rate and constant maturity Treasury rate, as well as between the TIPS and Treasury bond yields, suggesting that hedge funds exploit arbitrage opportunities in these fixed-income markets.

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