Investor Behaviour and Reaching for Yield: Evidence from the Sterling Corporate Bond Market

Czech, Robert; Roberts‐Sklar, Matt

doi:10.2139/ssrn.3058062

Cited by 10 publications

(12 citation statements)

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“…Corporate bond markets play a crucial role in the financial system by providing funding to the real economy. Corporate bonds are traded over-the-counter, with dealer banks intermediating the vast majority of trades (Czech and Roberts-Sklar, 2017). In the Zen data, I can observe all trades in sterling corporate bonds for UK-regulated firms, or branches of UK firms regulated in the EEA.…”

Section: Corporate Bond Summary Statisticsmentioning

confidence: 99%

Credit default swaps and corporate bond trading

Czech

2021

Journal of Financial Intermediation

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Using regulatory data on CDS holdings and corporate bond transactions, I provide evidence for a liquidity spillover effect from CDS to bond markets. Bond trading volumes are larger for investors with CDS positions written on the debt issuer, in particular around rating downgrades. I use a quasi-natural experiment to validate these findings. I also provide causal evidence that CDS mark-to-market losses lead to fire sales in the bond market. I instrument for the prevalence of mark-to-market losses with the fraction of non-centrally cleared CDS contracts of an individual counterparty. The monthly corporate bond sell volumes of investors exposed to large mark-to-market losses are three times higher than those of unexposed counterparties. Returns decrease by more than 100 bps for bonds sold by exposed investors, compared to same-issuer bonds sold by unexposed investors. My findings underline the risk of a liquidity spiral in the credit market.

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Section: Corporate Bond Summary Statisticsmentioning

confidence: 99%

Credit default swaps and corporate bond trading

Czech

2021

Journal of Financial Intermediation

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“…Unlike banks, funds do not need to comply with any regulatory constraints. However, as it was empirically shown in Czech and Roberts-Sklar (2019), funds are pro-cyclical and liquidate their assets to meet investor redemption at periods of stress. Following Baranova et al (2017) and Fricke and Fricke (2017), the amount of assets that fund f liquidates is:…”

Section: Initial Shockmentioning

confidence: 99%

Modelling Fire Sale Contagion Across Banks and Non-banks

2020

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We study the impact of common asset holdings across different financial sectors on financial stability. In particular, we model indirect contagion via fire sales across UK banks and non-banks. Fire sales are triggered by different responses to a financial shock: banks and non unit-linked insurers are subject to regulatory constraints, while funds and unit-linked insurers are obliged to meet investor redemptions. We use our model to conduct a systemic stress simulation under different initial shock scenarios and institutions' selling strategies. We find that performing a stress simulation that does not account for common asset holdings across multiple sectors can severely underestimate the fire sale losses in the financial system.

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“…Finally, our work is related to papers investigating the behaviour of trading investors after dierent types of shocks in the corporate bond markets. Czech and Roberts-Sklar (2017) and Timmer (2016) investigate which investors sell and buy corporate bonds whose price has been falling after a shock. Ellul et al (2011) The dataset covers the period between January 2012 and June 2017.…”

Section: Pioneering Work Bymentioning

confidence: 99%

“…We use proprietary transaction-level data to map the sterling corporate bond market trading network to understand rst its structure, and then second its resilience. The transaction data the Zen database provided by the UK Financial Conduct Authority allow us to identify both counterparties in each trade (Czech and Roberts-Sklar (2017)), enabling a full analysis of the trading network. We group counterparties into broad sectors: dealer banks, other banks, asset managers, insurance companies and hedge funds.…”

Section: Introductionmentioning

confidence: 99%

“…This dataset has also been used byCzech and Roberts-Sklar (2017),Aquilina and Suntheim (2016) andBenos and Zikes (2016), although the latter analyse gilts rather than corporate bonds.3 Agency trades are those where dealers act on behalf of a client to purchase or sell bonds in the market. Dealers do not hold any inventory on their balance sheet as a result of their activity in agency trades.…”

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Resilience of Trading Networks: Evidence from the Sterling Corporate Bond Market

2019

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We study the network structure and resilience of the sterling investment-grade and high-yield corporate bond markets. Using proprietary, transaction-level data, first we analyse the key properties of the trading networks in these markets. We find that the trading networks exhibit a core-periphery structure where a large number of non-dealers trade with a small number of dealers. Consistent with dealer behaviour in the primary market, we find that trading activity is particularly concentrated for newly issued bonds, where the top three dealers account for 45% of trading volume. Second, we test the resilience of these markets to the failure or paralysis of a key dealer, or to bond rating downgrades. We find that whilst the network structure has been broadly stable and the market broadly resilient around bond downgrades over our 2012-2017 sample period, the reliance on a small number of participants makes the trading network somewhat fragile to the withdrawal of a few key dealers from the market.

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Investor Behaviour and Reaching for Yield: Evidence from the Sterling Corporate Bond Market

Cited by 10 publications

References 0 publications

Credit default swaps and corporate bond trading

Credit default swaps and corporate bond trading

Modelling Fire Sale Contagion Across Banks and Non-banks

Resilience of Trading Networks: Evidence from the Sterling Corporate Bond Market

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