Institutional Corporate Bond Pricing

Abstract

We estimate an equilibrium demand-based corporate bond pricing model linking institutional holdings to bond characteristics. Our estimates show heterogeneity in demand elasticities across institutions, with elastic mutual funds demanding liquidity, akin to reaching for yield, and inelastic insurance companies. Moreover, we document stark differences in preferences for maturity, credit risk, and liquidity across institutions. In counterfactuals, we evaluate the pricing implications of credit quality migration, mutual fund fragility, monetary policy tightening, and a tapering of the Fed’s corporate credit facility. Our model predicts substantial disruptions in bond prices through shifts in institutional demand and identifies the composition of institutional demand as an important state variable for corporate bond pricing.

Keywords: Corporate Bond Pricing, Intermediary Asset Pricing, Demand Systems, Insurance Companies, Mutual Funds, Bond Market Fragility, ZLB, Interest Rate Liftoff, Fed Corporate Credit Facility.

JEL Classification: G11, G12, G21, G22. G23, G24