Institutional Corporate Bond Demand

47 Pages Posted: 15 Jan 2021 Last revised: 26 Jan 2021

See all articles by Lorenzo Bretscher

Lorenzo Bretscher

London Business School - Department of Finance

Lukas Schmid

University of Southern California - Marshall School of Business

Ishita Sen

Harvard University - Harvard Business School

Varun Sharma

London Business School

Date Written: December 7, 2020

Abstract

We compile a rich dataset that links institutional investors' position level holdings with corporate bond characteristics and estimate demand elasticities with respect to critical sources of risk. Persistence in institutions' holdings provide us with an instrument to isolate exogenous movements in prices. We find significant heterogeneity in demand elasticities across the main players in the corporate bond market, namely insurers, pension funds, and mutual funds. Long-term investors are sensitive to interest rate movements and supply liquidity, whereas mutual funds, with shorter investment horizon and benchmark constraints, demand liquidity. Price impact increased post-crisis for all institutions and has remained higher than the pre-crisis levels, signaling a general decline in bond market liquidity due perhaps to regulatory changes in the corporate bond market. Price impact jumped up significantly during COVID-19, perhaps suggesting a reluctance of dealers to intermediate in the market place, and illustrating that firms' funding opportunities are highly sensitive to investors' latent demand shocks. Our results have wide ranging implications for corporate bond pricing due to heterogeneity in investors and investment mandates, and are hard to reconcile with standard, representative agent based models.

Keywords: Corporate Bonds, Demand Systems, Insurance Companies, Mutual Funds, Liquidity

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

Suggested Citation

Bretscher, Lorenzo and Schmid, Lukas and Sen, Ishita and Sharma, Varun, Institutional Corporate Bond Demand (December 7, 2020). 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)

London Business School - Department of Finance ( email )

Sussex Place
Regent's Park
London NW1 4SA
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

Varun Sharma

London Business School ( email )

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

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