Topic: Institutional Corporate Bond Pricing
Speaker: Lorenzo Bretscher, Assistant Professor of Finance, University of Lausanne
Date: June 8, 2022 (Wednesday)
Time: 15:00-16:30
Location: 4-101
Language: English
Abstract:
We estimate an equilibrium demand-based corporate bond pricing model linking institutional holdings to bond characteristics. Our estimates show heterogeneity in demand elasticities across institutions, with elastic mutual funds demanding liquidity, akin to reaching for yield, and inelastic insurance companies. Moreover, we document stark differences in preferences for maturity, credit risk, and liquidity across institutions. In counterfactuals, we evaluate the pricing implications of credit quality migration, mutual fund fragility, monetary policy tightening, and a tapering of the Fed’s corporate credit facility. Our model predicts substantial disruptions in bond prices through shifts in institutional demand and identifies the composition of institutional demand as an important state variable for corporate bond pricing.
About the speaker:
Lorenzo Bretscher is Assistant Professor of Finance at the University of Lausanne. Before joining the faculty in Lausanne, Professor Bretscher was affiliated with the London Business School. In 2017, he was awarded the Nasdaq/European Finance Association Doctoral Tutorial Best Paper Award. Prior to his doctoral studies he worked as an analyst at Credit Suisse for two years.
Professor Bretscher is currently studying the different effects of uncertainty on economic and financial outcomes. He shows that interest rate uncertainty predicts slowdowns in real activity at both the aggregate and the firm level. Such uncertainty reduces investment in spite of hedging opportunities, as risk management by means of swaps remains nonetheless risky. He further finds that uncertainty regarding government spending is priced into bond and stock portfolios, increases inflation, and generates both positive inflation risk premia and positive term premia. Such results are useful to investors in today's economy, marked as it is by high uncertainty and increases in the scope and effect of government and central bank interventions.
