The Banking View of Bond Risk Premia

Haddad, Valentin; Sraer, David

doi:10.1111/jofi.12949

Cited by 59 publications

(12 citation statements)

References 60 publications

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“…Moreover, our results suggest that banks should become less willing to hold long-term assets as their deposits flow out. This can shed light on the finding of Haddad and Sraer (2019) that the income gap negatively predicts bond returns.…”

Section: Related Literaturementioning

confidence: 82%

Banking on Deposits: Maturity Transformation without Interest Rate Risk

Drechsler¹,

Savov²,

Schnabl³

2021

The Journal of Finance

222

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We show that maturity transformation does not expose banks to interest rate risk-it hedges it. The reason is the deposit franchise, which allows banks to pay deposit rates that are low and insensitive to market interest rates. Hedging the deposit franchise requires banks to earn income that is also insensitive, that is, to lend long term at fixed rates. As predicted by this theory, we show that banks closely match the interest rate sensitivities of their interest income and expense, and that this insulates their equity from interest rate shocks. Our results explain why banks supply long-term credit.

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Section: Related Literaturementioning

confidence: 82%

Banking on Deposits: Maturity Transformation without Interest Rate Risk

Drechsler¹,

Savov²,

Schnabl³

2021

The Journal of Finance

222

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“…Vissing-Jorgensen (2020) discusses the case for corporate bond purchases in the current crisis. This relates to a broader literature on asset pricing and intermediation in various asset classes ( He and Krishnamurthy 2018 ; Haddad and Muir forthcomings ; Haddad and Sraer 2020 ). Financial frictions appear to play a role in other markets as well during the crisis.…”

mentioning

confidence: 95%

When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and the Fed’s Response

Haddad

Moreira

Muir

2021

The Review of Financial Studies

Self Cite

252

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We document extreme disruption in debt markets during the COVID-19 crisis: a severe price crash accompanied by significant dislocations at the safer end of the credit spectrum. Investment-grade corporate bonds traded at a discount to credit default swaps; exchange-traded funds traded at a discount to net asset value, more so for safer bonds. The Federal Reserve’s announcement of corporate bond purchases caused these dislocations to disappear and prices to recover. These facts inform potential theories of the disruption. The best explanation is an acute liquidity need for specific bond investors, such as mutual funds, leading them to liquidate large positions.

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“…Here, improved funding conditions primarily trigger bond purchases. These funding constraint mechanics are in contrast to Haddad and Sraer (2016), who show that, if banks' balance sheet management is dominated by interest rate risk considerations, a larger than average net exposure of banks to long-term assets should be a predictor of larger bond risk premia. Interestingly, this is true for savings banks largely focusing on local credit supply.…”

Section: Levbdmentioning

confidence: 80%

“…The empirical results of European financial intermediaries are comparable to those of German main banks and savings banks. The positive relationship between banks' leverage and future returns of the German Bund shown in Panel A of Table 10 may be explained by resorting not only to interest rate risk management, as in Haddad and Sraer (2016) but also to a 'flight-to-quality' effect as suggested by Brunnermeier and Pedersen (2009) and Acharya and Pedersen (2005). The latter suggests that, in a market downturn, financial intermediaries face increasing liquidity risks of stock holdings, which lead them to substitute them with safe assets such as German government bonds and -in the case of main banks -also corporate bonds.…”

Section: Levbdmentioning

confidence: 99%

Procyclical leverage in Europe and its role in asset pricing

Baltzer

Koehl

Reitz

2020

Journal of International Money and Finance

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Research QuestionTypically, a bank's leverage follows a procyclical pattern. In times of tight funding conditions -as during the financial crisis -the broker-dealers' exposure is comparably low, implying a high marginal utility of wealth. In such a situation anticyclical assets having comparably high returns are beneficial because they reduce the influence of a general negative development of the stock markets on the balance sheet. Procyclical assets, in contrast, are risky and are expected to have higher returns in order to be attractive for investors. The direction and strength of the correlation between brokerdealers' leverage and excess returns should therefore determine the risk premium of asset portfolios. Moreover, recent theoretical studies show the predictability of the risk premium of the leverage ratio. The current paper examines the relevance of these issues for the German and European financial market. ContributionThus far, the described phenomena have mainly been documented for the US market. We look at the interrelationship between asset returns and broker-dealers' leverage ratio for the German and European market. In a second step, we test for systematic variation in the price of funding risk. For our analysis we use German data from 1971 to 2016. European data are available since 2000. ResultsOur analysis delivers two main results. First, we find that broker-dealers' leverage on the German stock market portfolios has explanatory power similar to "classical" factors from the asset pricing literature. For European broker-dealers, however, the results are somewhat weaker, most likely due to a significantly shorter sample. Thus, our results stress the potential of financial intermediaries' balance sheet management to accelerate booms and busts in asset markets. Additionally, we find that German broker-dealers' leverage contributes to the forecasts of one-quarter-ahead returns. Nichttechnische ZusammenfassungFragestellung Der Verschuldungsgrad von Banken folgt typischerweise einem prozyklischen Muster. In Zeiten angespannter Refinanzierungsmöglichkeiten, wie etwa während der Finanzkrise, sind die offenen Risikopositionen von Wertpapierhandelsbanken vergleichsweise niedrig, was einen hohen Grenznutzen des Vermögens impliziert. Antizyklische Vermögenswerte, die in diesen Zeiten hohe Erträge liefern, sind besonders vorteilhaft, weil sie den Einfluss einer allgemein negativen Entwicklung der Aktienmärkte auf die Bilanz dämpfen. Dagegen sind prozyklische Vermögenswerte risikoreich und sollten im Durchschnitt höhere Erträge erwirtschaften, damit sie von Investoren gehalten werden. Die Richtung und Stärke der Korrelation zwischen dem Verschuldungsgrad von Wertpapierhandelsbanken und den Uberschussrenditen sollte daher die erforderliche Risikoprämie von Aktienportfolios bestimmen. Darüber hinaus zeigen neuere theoretische Beiträge, dass die Risikoprämie des Verschuldungsgrads vorhersagbar sein sollte. Das vorliegende Papier untersucht, inwieweit diese Zusammenhänge für den deutschen und europäischen Finanzmar...

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The Banking View of Bond Risk Premia

Cited by 59 publications

References 60 publications

Banking on Deposits: Maturity Transformation without Interest Rate Risk

Banking on Deposits: Maturity Transformation without Interest Rate Risk

When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and the Fed’s Response

Procyclical leverage in Europe and its role in asset pricing

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