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APE-4: Liquidity in Corporate Bond Market
Corporate Bond Liquidity: Evidence from Government Guarantees
Federal Reserve Board, United States of America
We use a unique set of corporate bonds guaranteed by the full faith and credit of the U.S. to examine the default- and nondefault-related components in corporate bond spreads. Based on a matched sample of guaranteed and non-guaranteed corporate bonds, we find that 16% of the yield spread between investment grade corporate bonds and Treasury securities is not accounted for by government credit guarantees. Our estimate of the non-default component differs from the bond-CDS basis, suggesting that not only corporate bond spreads but also CDS spreads depend on non-default factors. Its magnitude is determined by the provision of dealer intermediation as well as bond-specific characteristics such as time to maturity and issue size.
Pledgeability and Asset Prices: Evidence from the Chinese Corporate Bond Markets
1MIT Sloan School of Management and NBER; 2PBC School of Finance, Tsinghua University; 3Booth School of Business, University of Chicago, and NBER; 4University of International Business and Economics, China, People's Republic of; 5CITIC Securities
We provide causal evidence for the value of asset pledgeability. Our empirical strategy is based on a unique feature of the Chinese corporate bond markets, where bonds with identical fundamentals are simultaneously traded on two segmented markets that feature different rules for repo transactions. We utilize a policy shock on December 8, 2014, which rendered a class of AA+ and AA bonds ineligible for repo on one of the two markets. By comparing how bond prices changed across markets and rating classes around this event, we estimate that an increase in haircut from 0 to 100% would result in an increase in bond yields in the range of 40 to 83 bps. These estimates help us infer the magnitude of the shadow cost of capital in China.
Market Accessibility, Corporate Bond ETFs, Liquidity
1Indiana University, United States of America; 2Southern Methodist University, United States of America
We find that market accessibility ex ante plays an important role in how the underlying assets’ liquidity changes when a basket security is introduced. First, using a multi-market version of the Kyle model, We show that the less (more) accessible the underlying market is, the more its liquidity improves (deteriorates) when basket trading becomes available. Second, We empirically test these predictions using corporate bonds before and after the introduction of ETFs. Consistent with the model, liquidity improvement is larger for highly arbitraged, low-volume, high-yield, and long-term bonds and for 144A bonds to which retail investor access is not permitted.
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