NBER

Paymon Khorrami

Imperial College Business School
South Kensington Campus
London, SW7 2AZ, UK
Tel: +44 073 6769 6606

E-Mail: EmailAddress: hidden: you can email any NBER-related person as first underscore last at nber dot org
Institutional Affiliation: Imperial College London

NBER Working Papers and Publications

November 2019Commonality in Credit Spread Changes: Dealer Inventory and Intermediary Distress
with Zhiguo He, Zhaogang Song: w26494
Two intermediary-based factors - a broad financial distress measure and a dealer corporate bond inventory measure - explain about 50% of the puzzling common variation of credit spread changes beyond canonical structural factors. A simple model, in which intermediaries facing margin constraints absorb supply of assets from customers, accounts for the documented explanatory power and delivers further implications with empirical support. First, whereas bond sorts on margin-related variables (credit rating and leverage) produce monotonic patterns in loadings on intermediary factors, non-margin-related sorts produce no pattern. Second, dealer inventory co-moves with corporate-credit assets only, whereas intermediary distress co-moves even with non-corporate-credit assets. Third, dealers' invent...

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