Finance and Economics Discussion Series (FEDS)
August 2024
Interconnectedness in the Corporate Bond Market
Celso Brunetti, Matthew Carl, Jacob Gerszten, Chiara Scotti, and Chaehee Shin
Abstract:
Does interconnectedness improve market quality? Yes. We develop an alternative network structure, the assets network: assets are connected if they are held by the same investors. We use several large datasets to build the assets network for the corporate bond market. Through careful identification strategies based on the COVID-19 shock and “fallen angels,” we find that interconnectedness improves market quality especially during stress periods. Our findings contribute to the debate on the role of interconnectedness in financial markets and show that highly interconnected corporate bonds allow for risk sharing and require a lower compensation for risk.
Keywords: Financial stability, Interconnectedness, Institutional investors, Big data
DOI: https://doi.org/10.17016/FEDS.2024.066
PDF: Full Paper
Disclaimer: The economic research that is linked from this page represents the views of the authors and does not indicate concurrence either by other members of the Board's staff or by the Board of Governors. The economic research and their conclusions are often preliminary and are circulated to stimulate discussion and critical comment. The Board values having a staff that conducts research on a wide range of economic topics and that explores a diverse array of perspectives on those topics. The resulting conversations in academia, the economic policy community, and the broader public are important to sharpening our collective thinking.