July 27, 2020

Across-the-Curve Credit Spread Indices 

This note, prepared jointly with Darrell Duffie and Yichao Zhu, presents a preliminary approach to the design of an across-the-curve credit spread index (AXI). The index is a measure of the recent average cost of wholesale unsecured debt funding for publicly listed U.S. bank holding companies and their commercial banking subsidiaries. This may be a useful benchmark for bank lending and related derivatives risk management applications. The index is a weighted average of credit spreads for unsecured debt instruments with maturities ranging from overnight to five years, with weights that reflect both transactions volumes and issuance volumes.

April 27, 2020

An updated version of the paper "The Decline of Too Big To Fail" is now available. This is joint work with Darrell Duffie (Stanford) and Yichao Zhu (ANU).

For globally systemically important banks (G-SIBs) with U.S. headquarters, we find large post-Lehman reductions in market-implied probabilities of government bailout, along with big increases in debt financing costs for these banks after controlling for insolvency risk. The data are consistent with significant effectiveness for the official sector's post-Lehman G-SIB failure-resolution intentions, laws, and rules. G-SIB creditors now appear to expect to suffer much larger losses in the event that a G-SIB approaches insolvency. In this sense, we estimate a major decline of "too big to fail.''

December 12, 2019

An updated version of the paper "Dealer Inventory, Short Interest and Price Efficiency in the Corporate Bond Market" is now available. This is joint work with Yichao Zhu (ANU).

In this paper, we propose an equilibrium model of over-the-counter corporate bond trading with short selling, asymmetric information and dealer inventory costs. The model predicts that higher inventory costs impose implicit short-sale constraints on informed investors and are thus associated with lower price efficiency. We construct bond-level proxies for inventory costs and provide empirical evidence in support of the model’s prediction. Our findings suggest that tighter post-GFC regulation may have had unintended consequences for corporate bond market quality.