Corporate Bond Multipliers: Substitutes Matter

73 Pages Posted: 16 Dec 2022 Last revised: 9 Sep 2023

See all articles by Manav Chaudhary

Manav Chaudhary

University of Chicago - Booth School of Business; University of Chicago - Department of Economics

Zhiyu Fu

The University of Chicago

Jian Li

Columbia University - Columbia Business School, Finance

Date Written: December 2, 2022

Abstract

Many economic questions require estimating the price impact of demand shifts in the bond market. In spite of corporate bonds having salient characteristics that distinguish close versus distant substitutes, existing estimates of corporate bond multipliers (the price increase in response to demand shifts) typically assume that all bonds, regardless of their characteristics, are equally good substitutes. In this paper, we show that accounting for the heterogeneous substitutability between bonds is critical for estimating multipliers. By allowing rich heterogeneous substitution patterns among bonds, we demonstrate that security-level multipliers are an order of magnitude smaller than previously estimated and are essentially zero. Nonetheless, aggregated portfolios exhibit substantially larger multipliers, reflecting the reduced availability of near substitutes for more aggregated portfolios. Furthermore, we find that the price impact reverts after a quarter, and that the multiplier is larger for high-yield bonds, longer-maturity bonds, and bonds with greater arbitrage risks.

Keywords: Corporate bonds, inelastic demand, mutual funds, demand-based asset pricing

JEL Classification: G10, G12, G23

Suggested Citation

Chaudhary, Manav and Fu, Zhiyu and Li, Jian, Corporate Bond Multipliers: Substitutes Matter (December 2, 2022). Available at SSRN: https://ssrn.com/abstract=4292266 or http://dx.doi.org/10.2139/ssrn.4292266

Manav Chaudhary

University of Chicago - Booth School of Business ( email )

5807 S Woodlawn Ave
Chicago, IL 60637
United States

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Zhiyu Fu

The University of Chicago

1101 East 58th Street
Chicago, IL 60637
United States

Jian Li (Contact Author)

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
United States

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