Best Paper Award in Market Microstructure, Semifinalist, FMA
2022 EFA Barcelona | FSB NBFI Workshop | 2022 FIRS | 2022 Finance Down Under | 2021 Colorado Finance Summit Job Market Session | 2021 AFBC Ph.D. Forum | 2021 FMA | 2021 ASSA/IBEFA | 2021 SGF | 2021 ERIC Doctoral Consortium | 2020 UT Austin PhD Student Symposium | 2020 LBS Transatlantic Doctoral Conference (conference cancelled)
ABSTRACT: I examine corporate bond market liquidity from 2004 to 2019 through the lens of the liquidity premium. I document that while commonly-used transaction cost measures such as the bid-ask spread have been declining, the corporate bond liquidity premium has actually increased since the financial crisis. For speculative bonds, about 30% of their yield spread now compensates for illiquidity compared to 15% before the crisis. I argue that post-crisis regulations have increased dealer's market making costs, forcing dealers to reduce their market making. This has caused investors to experience much longer trading delays, and so require a higher liquidity premium than before the crisis. Using a structural over-the counter model, I estimate the unobserved trading delays that are implied by the size of the liquidity premium, and show that bonds that took less than one day to sell before the financial crisis now take weeks to trade. Finally, I establish a causal relationship between the major post-crisis regulations and the variations in the corporate bond liquidity premium and trading delays. I show that Basel II.5, by introducing more stringent capital requirements for credit products, contributed the most to increasing the liquidity premium and trading delays out of the regulatory changes examined.
ABSTRACT: We uncover informed trading on the days before federal open market committee (FOMC) announcements. We show that this informed trading can explain the pre-FOMC announcement drift in the stock market, by contributing to the resolution of uncertainty before announcement. We document three distinct novel evidences supporting this. First, we show that U.S. corporate bond yield changes in the blackout period before FOMC announcements can predict monetary policy surprises, with about 30% R-squared. Second, and consistent with informed trading, we show that corporate bond customers tend to buy before upcoming expansionary FOMC surprises and sell before contractionary FOMC surprises. Finally, we uncover pre-FOMC information flow from corporate bond to the stock market by showing that (a) corporate bond yield changes Granger-cause stock market pre-FOMC movements, and (b) lagged corporate bond customer-dealer trade imbalances can explain pre-FOMC stock market returns, and the pre-announcement drift.
2017 IBEFA Summer
ABSTRACT: We analyze monetary policy transmission in the euro area from 2009--2016, including changes during the negative interest rate policy (NIRP) period as of June 2014. We identify three dimensions of ECB monetary policy related to surprise changes in (i) the target rate, (ii) the expected future path of the target rate (path factor), and (iii) longer-term interest rates (term factor). We find that surprise shocks about the target rate and the future path of the target rate have strong effects on interbank lending rates and government bond yields. Moreover, expansionary monetary policy surprises related to the term factor decrease government bond yields across all maturities and have strongest effects on medium- and long-term maturities. Prices of riskier assets, such as longer-term assets, sovereign bonds from crisis countries, or equities, increase significantly more in response to expansionary monetary policy shocks during the NIRP period. Moreover, during the NIRP period, expansionary target rate shocks further decrease loan interest rates and strongly increase the origination of new bank loans to businesses and households, particularly for loans with longer maturities.