Crowded Ratings: Clientele Effects in the Corporate Bond Market

48 Pages Posted: 28 Nov 2020

See all articles by Francisco Gomes

Francisco Gomes

London Business School

Ryan Lewis

University of Colorado, Boulder

Jordan Nickerson

MIT - Sloan

Date Written: October 8, 2020

Abstract

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

Suggested Citation

Gomes, Francisco and Lewis, Ryan and Nickerson, Jordan, Crowded Ratings: Clientele Effects in the Corporate Bond Market (October 8, 2020). Available at SSRN: https://ssrn.com/abstract=3707588 or http://dx.doi.org/10.2139/ssrn.3707588

Francisco Gomes

London Business School ( email )

Institute of Finance and Accounting
Sussex Place - Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 (Phone)
+44 20 7724 3317 (Fax)

HOME PAGE: http://www.london.edu/faculty/fgomes

Ryan Lewis

University of Colorado, Boulder ( email )

Boulder, CO 80309-0419
United States

Jordan Nickerson (Contact Author)

MIT - Sloan ( email )

100 Main Street
Cambridge, MA 02142
United States

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