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Crowded ratings: clientele effects in the corporate bond market

Subject

Finance, Finance

Publishing details

Social Sciences Research Network

Authors / Editors

Gomes F;Lewis R;Nickerson J

Biographies

Francisco Gomes

Publication Year

2020

Abstract

Consistent with a simple model of market segmentation, we document rating-based clientele effects in the corporate bond market. Net capital flows that arise due to idiosyncratic firm upgrades and downgrades cause significant price movements for the other bonds in the effected rating bucket. A one-standard-deviation flow into a rating bucket generates a 5 bp bond price reduction, equivalent to 4.1% of the monthly price variation driven by macro variables. This effect is highly persistent, with an approximate half-life of five months. Guided by the model, we also document a significant decaying spillover pattern to bond prices in adjacent buckets.

Keywords

Credit ratings; Clientele effects; Corporate bond pricing; Market segmentation

Series Number

3707588

Series

Social Sciences Research Network

Available on ECCH

No

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