Which Bonds to Sell in Fire Sales? Liquidity Versus Commonality of Holdings

Chaderina, Maria; Muermann, Alexander; Scheuch, Christoph

doi:10.2139/ssrn.2995544

Cited by 3 publications

(2 citation statements)

References 65 publications

(45 reference statements)

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“…Jian, Li, and Wang (2021) find that unlike tranquil market conditions, during heightened market uncertainty CBMF managers scale down liquid and illiquid asset classes proportionally. Chaderina, Muermann, and Scheuch (2022) focus on property and casualty insurance companies and find that during natural catastrophes, they sell more commonly held corporate bonds that appear to be more liquid ones. After controlling for commonality, they do not find a significant price impact for liquid bonds fire sale.…”

Section: Introductionmentioning

confidence: 99%

Flight from Liquidity and Corporate Bond Yields

Nejad,

Hoseinzade,

Molanaei

2023

Financial Market

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This paper documents that in distress periods, liquidity constrained investors sell liquid corporate bonds and hold onto illiquid ones, a phenomenon which we refer to as flight from liquidity. Performing within issuer‐time analysis to properly control for credit risk, we find that flight from liquidity results in a decline in the liquidity premium. In other words, liquid bonds that are significantly more expensive in normal market conditions, lose more value in distress periods and trade at a closer, and sometimes at an indistinguishable, yield spread to their illiquid peers from the same issuer. We also find that these shocks to the liquidity premium are short‐lived and do not have a long‐lasting pricing impact. We provide suggestive evidence that the liquidity clientele effect derives these results. Our findings suggest that investment exposure to liquid bonds entails a unique risk arising during periods of distress.

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Section: Introductionmentioning

confidence: 99%

Flight from Liquidity and Corporate Bond Yields

Nejad,

Hoseinzade,

Molanaei

2023

Financial Market

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“…For a more general overview on different aspects of financial contagion discussed in the literature, which are not directly relevant for this study, see Ahnert and Bertsch (2022) 1 . Chaderina, Mürmann, and Scheuch (2018) argue that institutional investors tend to sell liquid assets first causing trades to be focused on a specific selection of assets, which might lead to a more pronounced price drop for liquid assets than for illiquid ones. Similar to studies by Greenwood, Landier, and Thesmar (2015), the authors assume a linear relation between sold assets and the subsequent price change.…”

Section: Introductionmentioning

confidence: 99%

Contagion from Market Price Impact: A Price-at-Risk Perspective

et al. 2022

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Can quantitative investment improve market efficiency?—Evidence from China

Hu,

Xiang,

Zheng

et al. 2024

Euro Fin Management

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We investigate the impact of quantitative investment on market efficiency in China. We provide an illustrative model to show that quantitative investment enhances market efficiency. Empirically, we conduct both time‐series and cross‐sectional analysis. Regarding the time series dimension, we construct QuantDegree to measure the level of quantitative investment. We find that the performance of most anomalies decreases as QuantDegree increases. In the cross‐sectional dimension, we sort stocks into portfolios based on quant fund holdings and traditional anomalies. We find the anomaly return is lower within the groups with higher quant fund holdings, a result further confirmed by Fama–MacBeth regressions.

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Which Bonds to Sell in Fire Sales? Liquidity Versus Commonality of Holdings

Cited by 3 publications

References 65 publications

Flight from Liquidity and Corporate Bond Yields

Flight from Liquidity and Corporate Bond Yields

Contagion from Market Price Impact: A Price-at-Risk Perspective

Can quantitative investment improve market efficiency?—Evidence from China

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