Corporate Bond Specialness

35 Pages Posted: 3 Mar 2007

See all articles by Amrut J. Nashikkar

Amrut J. Nashikkar

New York University (NYU) - Department of Finance

Lasse Heje Pedersen

AQR Capital Management, LLC; Copenhagen Business School - Department of Finance; New York University (NYU); Centre for Economic Policy Research (CEPR)

Date Written: February 2007

Abstract

Using data on all corporate bond loans by one of the world's largest custodian banks, we study the main determinants of shorting costs as measured by rebate rate specialness. We find that 3.0% of corporate bonds are on loan, and 11% of loaned bonds have substantial shorting costs above 50 basis points. In the cross section, specialness is higher for bonds that are of worse credit rating, higher yield spread, smaller issues, less time to maturity, more illiquid, and bonds that appear expensive relative to the corresponding credit default swap. Bonds that are downgraded to speculative grade are more likely to be on special for several weeks before and after the downgrade, and are have large shorting activity. Finally, equity specialness is positively related to the firm's bond specialness and the bond-CDS basis.

Keywords: Fixed Income, Corporate Bonds, Short-sales constraints

JEL Classification: G10

Suggested Citation

Nashikkar, Amrut J. and Pedersen, Lasse Heje, Corporate Bond Specialness (February 2007). EFA 2007 Ljubljana Meetings Paper, Available at SSRN: https://ssrn.com/abstract=967545 or http://dx.doi.org/10.2139/ssrn.967545

Amrut J. Nashikkar (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
+1-212-998-0718 (Phone)

HOME PAGE: http://pages.stern.nyu.edu/~anashikk

Lasse Heje Pedersen

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

New York University (NYU) ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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