Dealer Inventory and the Cross-Section of Corporate Bond Returns

19 Pages Posted: 11 Mar 2024

See all articles by Nils Friewald

Nils Friewald

Norwegian School of Economics (NHH); Centre for Economic Policy Research (CEPR)

Florian Nagler

Bocconi University; Centre for Economic Policy Research (CEPR); IGIER - Innocenzo Gasparini Institute for Economic Research

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Abstract

We empirically study the role of dealers’ inventory risk in US corporate bond returns. To do so, we build a bond-level measure of exposure to inventory risk and find that the risk-adjusted return of a high-minus-low portfolio is 21 basis points per week. The inventory risk premium is amplified during times of crises, if hedging supply is low, as well as for bonds with higher credit risk. Our findings provide strong support for the asset pricing implication of inventory models and show that dealers use price pressure to compensate for bearing inventory risk.

Keywords: US corporate bond market, OTC market, dealer inventory, cross-sectional asset pricing

Suggested Citation

Friewald, Nils and Nagler, Florian, Dealer Inventory and the Cross-Section of Corporate Bond Returns. Available at SSRN: https://ssrn.com/abstract=4755158 or http://dx.doi.org/10.2139/ssrn.4755158

Nils Friewald

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Florian Nagler (Contact Author)

Bocconi University ( email )

Via Roentgen 1
Milan, MI 20136
Italy

HOME PAGE: http://sites.google.com/site/floriannagler/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Milan, MI 20136
Italy

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