Nonbank Fragility in Credit Markets: Evidence from a Two-Layer Asset Demand System *

Abstract

We develop a two-layer asset demand framework to analyze fragility in the corporate bond market. Households allocate wealth to institutions, and institutions then allocate funds to specific assets. The framework generates tractable joint dynamics of flows and asset values, featuring amplification and contagion. The framework can be estimated using micro-data on bond prices,  investor holdings, and fund flows, allowing for rich parameter heterogeneity across assets and institutions. We calibrate the model to the March 2020 turmoil and quantify the equilibrium effects of unconventional monetary and liquidity policies on asset prices and institutions. 

Keywords: Nonbanks, financial fragility, corporate bond markets, mutual fund flows, illiquidity, demand system asset pricing, unconventional monetary policy JEL codes: G23, G01, G12, E43, E44, E52

JEL Classification: G23, G01, G12, E43, E44, E52