When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and the Fed’s Response
By Valentin Haddad, Alan Moreira, Tyler Muir. The Review of financial studies, 2020
295 citations recorded by the source corpus.
Abstract 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.
Subfields: Finance
View Paper: https://www.semanticscholar.org/paper/0d3c597d051d077fd0a9495752093fe767c03c75
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Citations in the corpus
- Financial Fragility in the COVID-19 Crisis: The Case of Investment Funds in Corporate Bond Markets (2020, result): “Overall, our work complements recent studies of bond market disruptions in the COVID-19 crisis ( Haddad et al., 2020; Kargar et al., 2020 ) by zeroing in on bond funds.”
- Bank liquidity provision across the firm size distribution (2020, background): “Li et al. (2020) conjecture that these drawdowns reflected large firms drawing on credit lines as a substitute for the bond market disruptions in March ( Haddad et al., 2020 ).”
- Treasury inconvenience yields during the COVID-19 crisis (2020, unknown): “Parameterization We set τ̂ = 1 as the supply of Treasury bills were mostly unchanged through 2020Q1 (He and Krishnamurthy (2020)); T is set at 30 years as the longest bond issued by the U.”
- Return connectedness across asset classes around the COVID-19 outbreak (2020, background): “This would add to recent studies that focus on the role played by the COVID-19 on economic and financial variables (Baker et al., 2020; Haddad et al., 2020; Baig et al., 2020; Sharif et al., 2020).”
- What Explains the Covid-19 Stock Market? (2020, unknown): “While the figure is 8In contrast to the stock market reaction, Haddad, Moreira, and Muir (2020) find that the March 23rd announcement generated a 6% return on investment grade corporate debt at the time of the announcement. suggestive, it is unclear how much quantitative support for the market…”