Crowded Ratings: Clientele Effects in the Corporate Bond Market
48 Pages Posted: 28 Nov 2020
Date Written: October 8, 2020
Consistent with a simple model of market segmentation, we document rating-based clientele effects in the corporate bond market. Net capital flows that arise due to idiosyncratic firm upgrades and downgrades cause significant price movements for the other bonds in the effected rating bucket. A one-standard-deviation flow into a rating bucket generates a 5 bp bond price reduction, equivalent to 4.1% of the monthly price variation driven by macro variables. This effect is highly persistent, with an approximate half-life of five months. Guided by the model, we also document a significant decaying spillover pattern to bond prices in adjacent buckets.
Keywords: credit ratings, clientele effects, corporate bond pricing, market segmentation
JEL Classification: G11, G12, G14, G24, G4
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