Essays on Corporate Bond Market Liquidity and Dealer Behavior PDF Download

Author: Andreas Christian Rapp
Publisher:
ISBN: 9789056685744
Category :
Languages : en
Pages : 169

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Author: Shuo Liu
Publisher:
ISBN:
Category :
Languages : en
Pages : 215

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This dissertation consists of three chapters that study dealer's endogenous search effort in over-the-counter (OTC) financial markets and its effect on asset's liquidity risk in U.S. corporate bond markets. In Chapter 1, I study dealer's search intensity using a transaction-level data set on U.S. corporate bonds. The main target of this chapter is to test whether dealer's search intensity is endogenously determined by their idiosyncratic states and how search intensity affects market efficiency. Existing literatures commonly do not consider dealer's continuous adjustment of search intensity in search-and-match models and there is no paper using transaction-level data to estimate the dealer-level state-dependent search intensity. In this paper, I propose a search-and-match model with dealers' endogeneous and state-dependent search intensity and estimate it using the TRACE data for the U.S. corporate bond market. I find that: [1] if we rank all dealers by their private valuations for holding the bond, the dealer of the middle-level private valuation will choose the highest level of search intensity, and she works as the "dealer of dealers" to reallocate bond positions from the low-type dealers to the high-type dealers; [2] the estimated model gives us a quantitative evaluation of the inefficiency due to the decentralized market structure. At the average level across all sub-markets in our sample, the model estimates that dealers' search cost is 0.75% of bond's face value, and there is on average 8.64% of bond positions being misallocated, comparing with a counterfactual frictionless market. In conclusion, the decentralized market structure generates 8.96% welfare loss relative to the frictionless one. In Chapter 2, I study the correlation between corporate bond's misallocation among dealers and liquidity risk. This chapter bridges the literature on search-and-match models and the literature on explaining the non-default component of corporate bond's credit spread variations. In this paper, I propose a measure of bond's misallocation among dealers. This measure is based on a structural search-and-match model, and is defined as the cross-sectional covariance of dealers' idiosyncratic private valuations for holding the bond and their actual inventory positions in the bond. Using the TRACE data for the U.S. corporate bond market, I construct a panel data which contains yearly series of empirical estimates of bond's misallocation and liquidity risk, and verify that: at the bond level, a higher magnitude of misallocation among the dealers is associated with a higher magnitude of liquidity risk. This finding gives a preliminary market microstructural evidence supporting that: the distribution of market maker's states correlates with the magnitude of asset's liquidity risk. In Chapter 3, I theoretically study the social optimal policy function of dealer's meeting technology in over-the-counter markets. This chapter contributes to the existing literature by considering the dealer-level state-dependent meeting technology in a random search model and obtaining explicit-form solutions of the social optimal policy functions. In the model, I allow the agents (dealers) to freely adjust their meeting technologies based on two types of idiosyncratic states: asset position and liquidity need. I find that in the social optimal policy functions, there is no intermediation in the sense that no dealer will choose to search simultaneously on both the buy side and sell side of the market. This result applies for a general form of search-cost function.

Author: Jens Dick-Nielsen
Publisher:
ISBN: 9788759384473
Category :
Languages : en
Pages : 122

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The three essays study the US corporate bond market with special attention to bond liquidity. All essays are empirical studies which rely heavily on the availability of transactions data. Earlier studies had to use quoted bond prices for empirical studies, but with the introduction of the TRACE system and with the following dissemination of transaction prices the data quality on corporate bonds has improved immensely. In the years after 2000 a range of studies assessed the performance of structural credit risk models and found that they were not able to fully explain the size of the average credit spread for corporate bonds. Huang and Huang (2003) suggested (among others) that the remaining non-default-component of the credit spread was an illiquidity premium. Using transaction data this thesis studies the impact of illiquidity and trading frictions on corporate bonds.

Author: George Theocharides
Publisher:
ISBN:
Category :
Languages : en
Pages : 288

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This dissertation consists of twopapers. The first paper examines the propagation of firm-specific shocks as well as market-wide shocks between 1995-2003 using Treasury and corporate bond market data. It then tests the implications of previously proposed models of contagion. I find little support for the industry and counterparty structure hypothesis, suggesting that fundamentals do not generate contagion. Consistent with the information transmission, rebalancing, and liquidity-shock hypotheses, I find evidence of flight to quality during the event periods. However, in contrast to the prediction of the liquidity-shock channel, the corporate bond market, on average, seems to be more liquid during event periods (evidenced by higher trading volume, trading frequency, and mean bond age). Furthermore, there are no significant changes in the trading of assets with the low transaction costs, which is contrary to the rebalancing theory. These findings are more in favor of the correlated information channel as a means of inducing contagion. The second paper examines the effect of liquidity on corporate bond prices using the newly formed TRACE data set. In the spirit of Acharya and Pedersen's (2005) liquidity-adjusted capital asset pricing model (LCAPM), I examine the impact of multiple sources of risk on corporate bond prices. The results do not lend strong support for the existence of liquidity risk in the corporate bond market or for the LCAPM, especially when liquidity is captured using the trading frequency, trading volume, and turnover. Contrary to the predictions of the LCAPM, more illiquid portfolios do not have higher values for the three liquidity betas; betas that capture the commonality in liquidity with the market, the sensitivity in returns with the market-wide liquidity, and the liquidity sensitivity with the market returns. Furthermore, after running cross-sectional regressions I do not find strong evidence either for the validity of the model or that liquidity risk does matter for the corporate bond prices.

Author: Yüan Ma
Publisher:
ISBN:
Category :
Languages : en
Pages : 366

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Author: Nirmol Chandra Das
Publisher:
ISBN:
Category :
Languages : en
Pages : 0

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Chapter 1 sheds light on how vote trading affects voting outcome. Decentralized autonomous organization design implies that stakeholders vote to express their individual opinions. Nonetheless, this design is disrupted by vote trading. We take advantage of the blockchain data transparency and explore how vote trading affects voting outcome. Our findings indicate that vote trading facilitates the decision-making by better informed stakeholders. Specifically, informed stakeholders use purchased votes to signal the quality of their contributions to the platform and thereby attract the non-purchased votes of uninformed stakeholders. Vote buying typically attracts 51% more non-purchased votes, and the reputation of vote buying stakeholders improves over time. Therefore, it is unlikely that vote trading leads to overselling the platform contributions. We conduct an experiment to confirm the robustness of our findings. Finally, an event study reveals that a demand shock in the market for votes encourages voting by those stakeholders who used to abstain from voting before the shock. Our findings lend support to theoretical and experimental research showing the benefits of vote trading in the absence of the majority rule. In chapter 2, we find that elevated economic policy uncertainty (EPU) is associated with reductions in corporate bond dealer inventories and worsening liquidity, suggesting bond dealers react to increased inventory risk by reducing their capital commitments and compensating themselves via increased transaction costs. A one standard deviation increase in EPU is associated with a 2.19% widening in bid-ask spreads, 2.36% increase in Amihud illiquidity, and 3.38% reduction in average inventories. This effect is greater for bonds issued by firms with direct exposure to government policy, and less pronounced in small firms, illiquid bonds, and calmer markets, suggesting that EPU affects bond liquidity more when macroeconomic, but not idiosyncratic, factors are the primary determinant of bond risk. Chapter 3 tests how institutional attention affects liquidity in the corporate bond market. I find that institutional attention improves corporate bond market liquidity. By exploiting the Two-Stage Least Squares (2SLS) method, I show that abnormal institutional attention increases equity return volatility, which in turn results in improved liquidity in the corporate bond market. Further analysis reveals that this association does not vary significantly with the idiosyncratic risk of bonds and firms. This finding holds when controlling for bond liquidity determinants, market volatility, and firm fixed effects, and is robust to alternative measures of liquidity and institutional attention. This suggests that abnormal institutional attention is priced into bond liquidity when a shock in the equity market, due to higher institutional attention, leads to information incorporation in stock prices that flows to the OTC corporate bond market.

Author: Keh-Chian Chang
Publisher:
ISBN:
Category : Bondholders
Languages : en
Pages : 86

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Essay I: Institutional Bond Ownership and Financial Misconduct The first essay examines the role of institutional bondholders in reduction of the likelihood of financial misconduct. After controlling for a wide range of firm characteristics, we find firms that have greater institutional bond ownership reduce the likelihood of financial misreporting that eventually leads to class action litigation. In addition, relatively higher ownership by insurance companies decreases the likelihood of financial misconduct. We document consistent results using SEC enforcement actions as our second proxy for financial misrepresentation. The results suggest the potential and undocumented monitoring role of institutional bond investors. Essay II: Firm Visibility and Corporate Bond Liquidity The second essay examines the impact of firm visibility on bond liquidity. Using a range of visibility measures such as firm size, advertising expenses, breadth of stock and bond ownerships, and analyst coverage, we find strong evidence that visibility positively impacts bond liquidity. Our result is robust to alternative measures of liquidity and different estimation methodologies, and holds for bonds in all rating categories. To further prove the direct link between firm visibility and bond liquidity, we examine liquidity changes in bonds upon their issuing firms being added to the S & P 500 index, an exogenous visibility increasing event. We find a significant increase in bond liquidity relative to a control group after the index inclusion.

Author: Yifan Yu
Publisher:
ISBN:
Category :
Languages : en
Pages : 0

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This thesis consists of three chapters on institutional investors in bond market. Chapter 1 examines duration hedging behavior in corporate bond market by studying investment decisions of life insurance companies, the largest institutional investors in this market. I find that life insurers are tilting their corporate bond portfolios towards bonds with higher duration as interest rates decrease to historical lows since the 2008 financial crisis. This hunt-for-duration behavior is due to life insurers' interest rate risk hedging to ensure better duration matching between their assets and liabilities. I further show that hunt-for-duration by life insurers can drive overpricing of corporate bonds when negative monetary policy surprises hit. Chapter 2 investigates how the risk-based capital (RBC) reform in insurance industry initiated in year 1993 affects life insurers' investment behavior in corporate bonds, and how RBC-induced distortion in insurers' investment practices could have an impact on credit allocation, and ultimately real investment in the economy. Following the reform, I observe that insurers tilt their portfolios towards the lowest rated corporate bonds within a bond risk category defined by the RBC rule. Through shifting insurers' bond demand, I find that the RBC reform changes the credit supply conditions to a particular group of firms: those that have credit ratings barely fitting into a low-risk category and belong to industries where insurers hold more corporate bonds before the reform. Furthermore, I find that these firms take advantage of the more favorable credit allocation conditions to increase investment and employment after the reform. These results highlight a channel through which regulatory reform in insurance industry can bear real consequences.Chapter 3 studies whether life insurers rebalance their bond portfolios during Quantitative Easing (QE) programs initiated by the Federal Reserve (Fed) since the 2008 financial crisis. I find that life insurers sell QE securities and replace them with corporate bonds over certain QE periods. Moreover, life insurers rebalance toward corporate bonds in the lowest rating tier within a risk category defined by the RBC rule under which insurers are regulated. Overall, these findings show that QE's portfolio rebalancing channel can work through the life insurance sector.

Author: Ms.Diana Ayala Pena
Publisher: International Monetary Fund
ISBN: 1513539205
Category : Business & Economics
Languages : en
Pages : 45

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This paper studies the determinants of shifts in debt composition among EM non-financial corporates. We show that institutions and macro fundamentals create an enabling environment for bond market development. During the recent boom episode, however, global cyclical factors accounted for most of the variation of bond shares in total corporate debt. The sensitivity to global factors appears to vary with relative bond market size—which we interpret to be associated with liquidity and easy entry and exit—rather than local fundamentals. Foreign bank linkages help explain why bond markets increasingly substituted for banks in channeling liquidity to EMs. Our results highlight the risk of capital flow reversal in EMs that benefited from the upturn in the global financial cycle mostly due to their liquid markets rather than strong fundamentals.

Author: Paul-Olivier Klein
Publisher:
ISBN:
Category :
Languages : en
Pages : 0

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This dissertation studies the corporate bond market. Results emphasize the role of legal environment and governance. The first chapter demonstrates the role of creditors' protection and information on the corporate bond market. It identifies a non-homogenous impact across firms. The second chapter uses a meta-analysis to scrutinize the effect of a bond offering on the firm's value. It stresses the reasons underlying diverging results in the literature so far. The third chapter focuses on the Chinese corporate bond market and highlights the role of state and management ownership on the value created by a bond offering. The fourth chapter isolates a religious bias from professional investors and contributes to the literature on the impact of behavioural biases on the firm's value.