Limited Investment Capital and Credit Spreads

Siriwardane, Emil

doi:10.1111/jofi.12777

Cited by 104 publications

(39 citation statements)

References 43 publications

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“…For example,Siriwardane (2019) shows that shocks to the capital of financial intermediaries play a significant role in determining CDS spread dynamics.…”

mentioning

confidence: 99%

Crossing the Credit Channel: Credit Spreads and Firm Heterogeneity

Anderson

Cesa-Bianchi

2020

SSRN Journal

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We show that credit spreads rise after a monetary policy tightening, yet spread reactions are heterogeneous across firms. Exploiting information from a unique panel of corporate bonds matched with balance sheet data for US non-financial firms, we document that firms with high leverage experience a more pronounced increase in credit spreads than firms with low leverage. A large fraction of this increase is due to a component of credit spreads that is in excess of firms' expected default-the excess bond premium. Consistent with the spreads response, we also document that high-leverage firms experience a sharper contraction in debt and investment than low-leverage firms. Our results provide evidence that balance sheet effects are crucial for understanding the transmission mechanism of monetary policy.

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“…For example,Siriwardane (2019) shows that shocks to the capital of financial intermediaries play a significant role in determining CDS spread dynamics.…”

mentioning

confidence: 99%

Crossing the Credit Channel: Credit Spreads and Firm Heterogeneity

Anderson

Cesa-Bianchi

2020

SSRN Journal

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“…A policy maker can remedy this inefficiency by reducing the bargaining power of the seller relative to that of the buyer, for example, by reducing concentration in the provision of credit insurance. This is especially important for the CDS market, in which the sell side is twice as much concentrated as the buy side; see Siriwardane (2018). 3 Our findings suggest that merging safe banks with low initial exposure is not welfare-enhancing.…”

Section: Introductionmentioning

confidence: 81%

Managing Counterparty Risk in OTC Markets

Capponi

Frei²,

Brunetti³

2018

FEDS

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We study how banks manage their default risk to optimally negotiate quantities and prices of contracts in over-the-counter markets. We show that costly actions exerted by banks to reduce their default probabilities are inefficient. Negative externalities due to counterparty concentration may lead banks to reduce their default probabilities even below the social optimum. The model provides new implications which are supported by empirical evidence: (i) intermediation is done by low-risk banks with medium initial exposure; (ii) the risk-sharing capacity of the market is impaired, even when the trade size limit is not binding; and (iii) intermediaries play the fundamental role of diversifying the idiosyncratic risk in CDS contracts, besides increasing the risk-sharing capacity of the market.

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“…These papers analyze only the trades that occur for intermediation purposes and thus are silent about the net trading volume. However, Siriwardane () looked at both net and gross volume in the CDS market and he found that not only do intermediaries have higher gross volume than customers, but they also account for higher net selling and net buying volume. To sum up, Proposition is suggestive of the fact that these empirical findings corroborate the endogenous customer‐intermediary trading patterns that arise from heterogeneity in meeting rates rather than those that arise from heterogeneity in asset positions or exogenous valuations.…”

Section: Equilibriummentioning

confidence: 99%

Pricing and Liquidity in Decentralized Asset Markets

Üslü

2019

ECTA

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I develop a search‐and‐bargaining model of endogenous intermediation in over‐the‐counter markets. Unlike the existing work, my model allows for rich investor heterogeneity in three simultaneous dimensions: preferences, inventories, and meeting rates. By comparing trading‐volume patterns that arise in my model and are observed in practice, I argue that the heterogeneity in meeting rates is the main driver of intermediation patterns. I find that investors with higher meeting rates (i.e., fast investors) are less averse to holding inventories and more attracted to cash earnings, which makes the model corroborate a number of stylized facts that do not emerge from existing models: (i) fast investors provide intermediation by charging a speed premium, and (ii) fast investors hold more extreme inventories. Then, I use the model to study the effect of trading frictions on the supply and price of liquidity. On social welfare, I show that the interaction of meeting rate heterogeneity with optimal inventory management makes the equilibrium inefficient. I provide a financial transaction tax/subsidy scheme that corrects this inefficiency, in which fast investors cross‐subsidize slow investors.

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Limited Investment Capital and Credit Spreads

Cited by 104 publications

References 43 publications

Crossing the Credit Channel: Credit Spreads and Firm Heterogeneity

Crossing the Credit Channel: Credit Spreads and Firm Heterogeneity

Managing Counterparty Risk in OTC Markets

Pricing and Liquidity in Decentralized Asset Markets

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