Institutional Corporate Bond Pricing

75 Pages Posted: 15 Jan 2021 Last revised: 9 Feb 2022

See all articles by Lorenzo Bretscher

Lorenzo Bretscher

Swiss Finance Institute - HEC Lausanne; Centre for Economic Policy Research (CEPR)

Lukas Schmid

University of Southern California - Marshall School of Business

Ishita Sen

Harvard University - Harvard Business School; affiliation not provided to SSRN

Varun Sharma

London Business School

Date Written: January 31, 2022

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

Suggested Citation

Bretscher, Lorenzo and Schmid, Lukas and Sen, Ishita and Sharma, Varun, Institutional Corporate Bond Pricing (January 31, 2022). Swiss Finance Institute Research Paper No. 21-07, Available at SSRN: https://ssrn.com/abstract=3756280 or http://dx.doi.org/10.2139/ssrn.3756280

Lorenzo Bretscher (Contact Author)

Swiss Finance Institute - HEC Lausanne ( email )

Chavannes-près-Renens, Vaud
Switzerland
1015 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Lukas Schmid

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd, HOH 431
Los Angeles, CA California 90089-1424
United States

Ishita Sen

Harvard University - Harvard Business School ( email )

Soldiers Field
Baker Library
Boston, MA 02163
United States

affiliation not provided to SSRN

Varun Sharma

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

HOME PAGE: http://www.sharmav.com

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