Commonality in Credit Spread Changes: Dealer Inventory and Intermediary Distress / Zhiguo He, Paymon Khorrami, Zhaogang Song.

Format:

Book

Author/Creator:

He, Zhiguo.

Contributor:

National Bureau of Economic Research.

Khorrami, Paymon.

Song, Zhaogang.

Series:

Working Paper Series (National Bureau of Economic Research) no. w26494.

NBER working paper series no. w26494

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Commonality in Credit Spread Changes

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2019.

Summary:

Two intermediary-based factors - a broad financial distress measure and a dealer corporate bond inventory measure - explain about 50% of the puzzling common variation of credit spread changes beyond canonical structural factors. A simple model, in which intermediaries facing margin constraints absorb supply of assets from customers, accounts for the documented explanatory power and delivers further implications with empirical support.

First, whereas bond sorts on margin-related variables (credit rating and leverage) produce monotonic patterns in loadings on intermediary factors, non-margin-related sorts produce no pattern. Second, dealer inventory co-moves with corporate-credit assets only, whereas intermediary distress co-moves even with non-corporate-credit assets. Third, dealers' inventory increases, and bond prices decline, in response to instrumented bond sales by institutional investors, using severe downgrades ("fallen angels'') and disaster-related insurance losses as IVs.

Notes:

Print version record

November 2019.