Authors: Zhiguo He, Paymon Khorrami, Zhaogang Song

Citations: 55

Published: 2022-01-24T00:00:00.000Z

Why It Matters

Venue: Review of Financial Studies. Year: 2022. Citations: 55. Abstract signal: Abstract Two intermediary-based factors—a corporate bond dealer inventory measure and a broad intermediary distress measure—explain more than 40$\%$ of the puzzling common variation in credit spread changes beyond canoni...

Abstract

Abstract Two intermediary-based factors—a corporate bond dealer inventory measure and a broad intermediary distress measure—explain more than 40$\%$ of the puzzling common variation in credit spread changes beyond canonical structural factors. A simple intermediary-based model with partial market segmentation accounts for intermediary factors’ explanatory power and delivers three further implications with empirical support. First, whereas bond sorts on risk-related variables produce monotonic loading patterns on intermediary factors, non-risk-related sorts produce no pattern. Second, dealer inventory comoves with corporate-credit assets only, whereas intermediary distress comoves with both corporate-credit and non-corporate-credit assets. Third, dealers’ inventory responds to (instrumented) bond sales by institutional investors.