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Dealer inventory and the cross-section of corporate bond returns

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  • Friewald, Nils
  • Nagler, Florian

Abstract

We empirically study the role of dealers’ inventory risk in US corporate bond returns. To do so, we build a bond-level measure of exposure to inventory risk and find that the risk-adjusted return of a high-minus-low portfolio is 21 basis points per week. The inventory risk premium is amplified during times of crises, if hedging supply is low, as well as for bonds with higher credit risk. Our findings provide strong support for the asset pricing implication of inventory models and show that dealers use price pressure to compensate for bearing inventory risk.

Suggested Citation

  • Friewald, Nils & Nagler, Florian, 2024. "Dealer inventory and the cross-section of corporate bond returns," Economics Letters, Elsevier, vol. 239(C).
    • Handle: RePEc:eee:ecolet:v:239:y:2024:i:c:s0165176524001939
    DOI: 10.1016/j.econlet.2024.111710
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    More about this item

    Keywords

    US corporate bond market; OTC market; Dealer inventory; Cross-sectional asset pricing;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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