Topic: Passive Demand and Active Supply: Evidence from Maturity-mandated Corporate Bond Funds
Speaker: Lukas Schmid, Professor of Finance and Business Economics, Marshall School of Business, University of Southern California
Time: 10:00am-11:30am, May 22
Location: 4-101
Abstract:
We identify a novel and common exogenous demand shock caused by passive funds in the corporate bond market. Specifically, passive fund demand for corporate bonds displays discontinuity around the maturity cutoffs separating long-term, intermediate-term, and short-term bonds and increases significantly upon a bond’s crossing of 10-, 5-, and 3- year time-to-maturity cutoffs. We develop a novel identification strategy to study the impact of passive fund demand in the corporate bond market. First, we find that these non-fundamental demand shifts lead to a significant and lasting decrease in yield spreads, as well as persistent liquidity improvements. Second, passive fund demand shocks spill over to the primary market, causing lower issuing yield spreads, and firms engaging in debt market timing by substituting expensive bank debt with cheaper bond financing. We provide causal evidence that non-fundamental demand shocks can have real effects in that constrained firms use issuance proceeds to fund investment. Our findings inform the ongoing debate about the regulatory treatment of cross-trades between funds by the SEC.
Speaker Biography:
Lukas Schmid is Professor of Finance and Business Economics at the Marshall School of Business, University of Southern California, and a CEPR Research Fellow. Before joining Marshall, Lukas spent a decade at the Fuqua School of Business at Duke University. He currently serves as an Editor for the Finance Area at Management Science. Lukas' research interests are in dynamic quantitative modeling and structural estimation applied at the intersection of macroeconomics and financial economics. His most recent work was concerned with corporate and sovereign default and credit risk, as well as links between innovation, long-run growth and financial market performance. Lukas’ research has been published in outlets such as the American Economic Review, the Journal of Finance, the Journal of Financial Economics, the Review of Financial Studies and the Journal of Monetary Economics. His work on capital structure and asset returns was awarded a Smith-Breeden Award (First Prize) for the best paper in the Journal of Finance, 2010. At Marshall, he teaches investments to undergraduate students and advanced asset pricing to PhD students. Lukas obtained a master’s degree in mathematics from ETH Zurich and a PhD in Finance from the University of Lausanne & Swiss Finance Institute.
