Commonality in Credit Spread Changes: Dealer Inventory and Intermediary Distress

Zhiguo He (), Paymon Khorrami and Zhaogang Song

The Review of Financial Studies, 2022, vol. 35, issue 10, 4630-4673

Abstract: Two intermediary-based factors—a corporate bond dealer inventory measure and a broad intermediary distress measure—explain more than 40 of the puzzling common variation in credit spread changes beyond canonical structural factors. A simple intermediary-based model with partial market segmentation accounts for intermediary factors’ explanatory power and delivers three further implications with empirical support. First, whereas bond sorts on risk-related variables produce monotonic loading patterns on intermediary factors, non-risk-related sorts produce no pattern. Second, dealer inventory comoves with corporate-credit assets only, whereas intermediary distress comoves with both corporate-credit and non-corporate-credit assets. Third, dealers’ inventory responds to (instrumented) bond sales by institutional investors.

JEL-codes: E58 G12 G18 G21 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (14)

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Working Paper: Commonality in Credit Spread Changes: Dealer Inventory and Intermediary Distress (2019)
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