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Publications
Publications
  • 2020
  • Working Paper

Institutional Corporate Bond Pricing

By: Ishita Sen, Lorenzo Bretscher, Lukas Schmid and Varun Sharma
  • Format:Print
  • | Language:English
  • | Pages:75
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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; Bonds; Insurance; Investment Funds; Financial Liquidity

Citation

Sen, Ishita, Lorenzo Bretscher, Lukas Schmid, and Varun Sharma. "Institutional Corporate Bond Pricing." Working Paper, December 2020. (Revised January 2022. Revise and Resubmit, Review of Financial Studies.)
  • SSRN

About The Author

Ishita Sen

Finance
→More Publications

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    • April 2021 (Revised April 2022)
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    Next Insurance: Considering New Markets

    By: David S. Scharfstein, Ishita Sen and Dean Xu
More from the Authors
  • Dicerna By: Malcolm Baker, Ishita Sen and Jonathan Wallen
  • Pricing of Climate Risk Insurance: Regulation and Cross-Subsidies By: Ishita Sen, Ana-Maria Tenekedjieva and Sangmin Oh
  • Next Insurance: Considering New Markets By: David S. Scharfstein, Ishita Sen and Dean Xu
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