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  • 2020
  • Working Paper

Institutional Corporate Bond Demand

By: Ishita Sen, Lorenzo Bretscher, Lukas Schmid and Varun Sharma
  • Format:Print
  • | Language:English
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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 Demand." Working Paper, December 2020.
  • SSRN

About The Author

Ishita Sen

Finance
→More Publications

More from the Authors

    • April 2021 (Revised April 2022)
    • Faculty Research

    Next Insurance: Considering New Markets

    By: David S. Scharfstein, Ishita Sen and Dean Xu
    • 2021
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    Pricing of Climate Risk Insurance: Regulatory Frictions and Cross-Subsidies

    By: Ishita Sen and Ana-Maria Tenekedjieva
    • 2020
    • Faculty Research

    Internal Models, Make Believe Prices, and Bond Market Cornering

    By: Ishita Sen and Varun Sharma
More from the Authors
  • Next Insurance: Considering New Markets By: David S. Scharfstein, Ishita Sen and Dean Xu
  • Pricing of Climate Risk Insurance: Regulatory Frictions and Cross-Subsidies By: Ishita Sen and Ana-Maria Tenekedjieva
  • Internal Models, Make Believe Prices, and Bond Market Cornering By: Ishita Sen and Varun Sharma
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