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Working Paper
Institutional Herding and Its Price Impact : Evidence from the Corporate Bond Market
Among growing concerns about potential financial stability risks posed by the asset management industry, herding has been considered as an important risk amplification channel. In this paper, we examine the extent to which institutional investors herd in their trading of U.S. corporate bonds and quantify the price impact of such herding behavior. We find that, relative to what is documented for the equity market, the level of institutional herding is much higher in the corporate bond market, particularly among speculative-grade bonds. In addition, mutual funds have become increasingly likely ...
Working Paper
Institutional herding in the corporate bond market
We find substantial herding in U.S. corporate bonds among bond fund managers, much higher than that previously documented for the equity market. Herding is generally stronger among illiquid bonds, and buy herding and sell herding are driven by different factors. In particular, sell herding increases on negative news about bond ratings and corporate earnings. Interestingly, increases in ex-post transparency in corporate bond trading through Trade Reporting and Compliance Engine (TRACE) led to higher buy herding but not to higher sell herding. Finally, we find significant return reversals in ...
Working Paper
Fresh start or head start? The effect of filing for personal bankruptcy on the labor supply
The key feature of the modern U.S. personal bankruptcy law is to provide debtors a financial fresh start through debt discharge. The primary justification for the discharge policy is to preserve human capital by maintaining incentives for work. In this paper, we test this fresh start argument by providing the first estimate of the effect of personal bankruptcy filing on the labor supply using data from the Panel Study of Income Dynamics (PSID). Our econometric approach controls for the endogenous self-selection of bankruptcy filing and allows for dependence over time for the same household. ...
Journal Article
Inflation and the size of government
It is commonly supposed in public and academic discourse that inflation and big government are related. The authors show that economic theory delivers such a prediction only in special cases. As an empirical matter, inflation is significantly positively related to the size of government mainly when periods of war and peace are compared. The authors find a weak positive peacetime time series correlation between inflation and the size of government and a negative cross-country correlation of inflation with non-defense spending.
Working Paper
An empirical analysis of bond recovery rates: exploring a structural view of default
A frictionless, structural view of default has the unrealistic implication that recovery rates on bonds, measured at default, should be close to 100 percent. This suggests that standard "frictions" such as default delays, corporate-valuation jumps, and bankruptcy costs may be important drivers of recovery rates. A structural view also suggests the existence of nonlinearities in the empirical relationship between recovery rates and their determinants. We explore these implications empirically and find direct evidence of jumps, and also evidence of the predicted nonlinearities. In particular, ...
Conference Paper
Liquidity, runs, and security design: lessons from the collapse of the auction rate municipal bond market
In this paper, we use the recent collapse of the ARS market as a case study on important issues regarding fragility of financial innovations and systemic risks. We find strong evidence of investor runs for liquidity, partly caused by a self-fulfilling panic. In addition, coordination failures triggered by an unexpected first mover led all major broker-dealers to simultaneously withdraw their liquidity support. We also find that the likelihood of auction failures and ARS reset rates depend significantly on both the rule and the level of maximum auction rates; that, as predicted by auction ...
Working Paper
Inflation and the Size of Government
It is commonly supposed in public and academic discourse that inflation and big government are related. We show that economic theory delivers such a prediction only in special cases. As an empirical matter, inflation is significantly positively related to the size of government mainly when periods of war and peace are compared. We find a weak positive peacetime time series correlation between inflation and the size of government and a negative cross-country correlation of inflation with non-defense spending.
Working Paper
Information and Liquidity of OTC Securities : Evidence from Public Registration of Rule 144A Bonds
The Rule 144A private debt represents a significant and growing segment of the U.S. bond market. This paper examines the market liquidity effects of enhanced information disclosure induced by the public registration of 144A bonds. Using the regulatory version of TRACE data for the period 2002-2013, we find that following public registration of 144A bonds, dealer-specific effective bid-ask spreads narrow, especially for issues with higher ex-ante information asymmetry. Our results are consistent with existing theories that disclosure reduces information risk and thus improves market liquidity.
Working Paper
Trading Relationships in the OTC Market for Secured Claims : Evidence from Triparty Repos
We use a new panel data set on intraday transactions of triparty repos (TPR) to study trading relationships in the over-the-counter market. We test the prediction that search frictions lead to relationship formation. We find that TPR trading parties form relationships with a broad number of counterparties but tend to focus their transaction volumes on only a small set of counterparties. We also find that having stable relationships and broader interactions across other funding markets positively shapes the relationships of investors with dealers in the TPR market. Finally, our results suggest ...
Working Paper
The fragility of discretionary liquidity provision - lessons from the collapse of the auction rate securities market
We study the fragility of discretionary liquidity provision by major financial intermediaries during systemic events. The laboratory of our study is the recent collapse of the auction rate securities (ARS) market. Using a comprehensive dataset constructed from auction reports and intraday transactions data on municipal ARS, we present quantitative evidence that auction dealers acted at their own discretion as "market makers" before the market collapsed. We show that this discretionary liquidity provision greatly affected both net investor demand and auction clearing rates. Importantly, such ...