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Trends in Arbitrage-Based Measures of Bond Liquidity
Corporate bonds are an important source of funding for public corporations in the United States. When these bonds cannot be easily traded in secondary markets or when investors cannot easily hedge their bond positions in derivatives markets, the issuance costs to corporations increase, leading to higher overall funding costs. In this post, we examine recent trends in arbitrage-based measures of liquidity in corporate bond and credit default swap (CDS) markets and evaluate potential explanations for the deterioration in these measures that occurred between the middle of 2015 and early 2016.
We study how the risks to future liquidity flow across corporate bond, Treasury, and stock markets. We document distribution ?flight-to-safety? effects: a deterioration in the liquidity of high-yield corporate bonds forecasts an increase in the average liquidity of Treasury securities and a decrease in uncertainty about the liquidity of investment-grade corporate bonds. While the liquidity of Treasury securities both affects and is affected by the liquidity in the other two markets, corporate bond and equity market liquidity appear to be largely divorced from each other. Finally, we show that ...
Measuring Corporate Bond Market Dislocations
We measure dislocations in the market for corporate bonds in real time with the Corporate Bond Market Distress Index (CMDI), allowing for the aggregation of a broad set of measures of market functioning from primary and secondary bond markets into a single measure. The index quantifies dislocations from a preponderance-of-metrics perspective, ensuring that the measure of market distress is not driven by any one statistic. We document that the index correctly identifies periods of dislocations, is robust to alternative choices of the aggregation procedure, and provides differential predictive ...
Measuring the Forest through the Trees: The Corporate Bond Market Distress Index
With more than $10.4 trillion outstanding as of Q3:2020, the U.S. corporate bond market is a significant source of funding for most large U.S. corporations. While prior literature offers a variety of measures to capture different aspects of corporate bond market functioning, there is little consensus on how to use those measures to identify periods of distress in the market as a whole. In this post, we describe the U.S. Corporate Bond Market Distress Index (CMDI), which offers a single measure to quantify joint dislocations in the primary and secondary corporate bond markets. As detailed in a ...