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Keywords:corporate bonds 

Discussion Paper
The Primary and Secondary Market Corporate Credit Facilities

On April 9, the Federal Reserve announced that it would take additional actions to provide up to $2.3 trillion in loans to support the economy in response to the coronavirus pandemic. Among the initiatives are the Primary Market and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF), whose intent is to provide support for large U.S. businesses that typically finance themselves by issuing debt in capital markets. Corporate bonds support the operations of companies with more than 17 million employees based in the United States and these bonds are key assets for retirees and pension ...
Liberty Street Economics , Paper 20200526a

Report
Corporate Credit Provision

Productive firms can access credit markets directly by issuing corporate bonds or by borrowing through financial intermediaries. In this paper, we study the cyclical properties of corporate credit provision through these two types of debt instruments in major advanced economies. We argue that the cyclicality of corporate credit is closely related to the cyclicality of the types of financial intermediaries active in the provision of credit. When a debt instrument is held by institutions that manage their balance sheets through debt issuance, credit provision through that instrument is ...
Staff Reports , Paper 895

Working Paper
Estimating the Price of Default Risk

A firm's instantaneous probability of default is modeled as a square-root diffusion process. The parameters of these processes are estimated for 188 firms, using both the time series and cross-sectional (term structure) properties of the individual firms' bond prices. Although the estimated models are moderately successful at bond pricing, there is strong evidence of misspecification. The results indicate that single factor models of instantaneous default risk face a significant challenge in matching certain key features of actual corporate bond yield spreads. In particular, such models have ...
Finance and Economics Discussion Series , Paper 1996-29

Journal Article
Trends in credit basis spreads

Market participants and policymakers were surprised by the large, prolonged dislocations in credit market basis trades during the second half of 2015 and the first quarter of 2016. In this article, we examine three explanations proposed by market participants: increased idiosyncratic risks, strategic positioning by asset managers, and regulatory changes. We find some evidence of increased idiosyncratic risk during the relevant period, but limited evidence of asset managers changing their positioning in derivative products. Although we cannot quantify the contribution of these two channels to ...
Economic Policy Review , Issue 24-2 , Pages 15-37

Discussion Paper
Corporate Bond Market Liquidity Redux: More Price-Based Evidence

In a recent post, we presented some preliminary evidence suggesting that corporate bond market liquidity is ample. That evidence relied on bid-ask spread and price impact measures. The findings generated significant discussion, with some market participants wondering about the magnitudes of our estimates, their robustness, and whether such measures adequately capture recent changes in liquidity. In this post, we revisit these measures to more thoroughly document how they have varied over time and the importance of particular estimation approaches, trade size, trade frequency, and the ...
Liberty Street Economics , Paper 20160209

Report
Market liquidity after the financial crisis

This paper examines market liquidity in the post-crisis era in light of concerns that regulatory changes might have reduced dealers? ability and willingness to make markets. We begin with a discussion of the broader trading environment, including an overview of regulations and their potential effects on dealer balance sheets and market making, but also considering additional drivers of market liquidity. We document a stagnation of dealer balance sheets after the financial crisis of 2007-09, which occurred concurrently with dealer balance sheet deleveraging. However, using high-frequency trade ...
Staff Reports , Paper 796

Report
Did liquidity providers become liquidity seekers?

The misalignment between corporate bond and credit default swap (CDS) spreads (i.e., CDS-fbond basis) during the 2007-09 financial crisis is often attributed to corporate bond dealers shedding off their inventory, right when liquidity was scarce. This paper documents evidence against this widespread perception. In the months following Lehman?s collapse, dealers, including proprietary trading desks in investment banks, provided liquidity in response to the large selling by clients. Corporate bond inventory of dealers rose sharply as a result. Although providing liquidity, limits to arbitrage, ...
Staff Reports , Paper 650

Report
Credit market choice

Which markets do institutions use to change exposure to credit risk? Using a unique data set of transactions in corporate bonds and credit default swaps (CDS) by large financial institutions, we show that simultaneous transactions in both markets are rare, with an average institution having an 11 percent probability of transacting in both the CDS and bond markets in the same entity in an average week. When institutions do transact in both markets simultaneously, they increase their speculative positions in CDS by 13 cents per dollar of bond transactions, and their hedging positions by 13 ...
Staff Reports , Paper 863

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