Nonbank Fragility in Credit Markets: Evidence from a Two-Layer Asset Demand System

65 Pages Posted: 12 Dec 2022 Last revised: 6 Jul 2023

See all articles by Olivier Darmouni

Olivier Darmouni

Columbia University - Columbia Business School, Finance

Kerry Siani

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Kairong Xiao

Columbia University - Columbia Business School

Date Written: November 29, 2022

Abstract

We develop a two-layer asset demand framework to analyze fragility in the corporate bond market. Households allocate wealth to institutions, and institutions then allocate funds to specific assets. The framework generates tractable joint dynamics of flows and asset values, featuring amplification and contagion. The framework can be estimated using micro-data on bond prices, investor holdings, and fund flows, allowing for rich parameter heterogeneity across assets and institutions. We match the model to the March 2020 turmoil and quantify the equilibrium effects of unconventional monetary and liquidity policies on asset prices and institutions.

Keywords: Nonbanks, financial fragility, corporate bond markets, mutual fund flows, illiquidity, demand system asset pricing, unconventional monetary policy

JEL Classification: G23, G01, G12, E43, E44, E52

Suggested Citation

Darmouni, Olivier and Siani, Kerry and Xiao, Kairong, Nonbank Fragility in Credit Markets: Evidence from a Two-Layer Asset Demand System (November 29, 2022). Available at SSRN: https://ssrn.com/abstract=4288695 or http://dx.doi.org/10.2139/ssrn.4288695

Olivier Darmouni (Contact Author)

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
United States

Kerry Siani

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

Kairong Xiao

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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