Fragmented Intermediation, Bond Risk Premia, and Market Stability

• Applicants: Professor Dr. Philipp Schuster; Professorin Dr. Marliese Uhrig-Homburg
• Subject Area: Accounting and Finance
• Term: since 2021
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 447617473

Intermediation in the corporate bond market has undergone a tremendous change over the last two decades. First, due to stricter regulation, bank-affiliated dealers that are typically marginal in many asset classes withdraw from providing dealer services. Second, mutual funds and ETFs that are often restricted through their investment policies to a rather limited asset universe hold an ever-increasing proportion of the total outstanding volume in their portfolios. We aim to investigate this change in intermediation from institutions that are marginal in many asset classes to fragmented intermediation with intermediaries that are only marginal for particular bonds or bond market segments. These shifts have significant effects on bond pricing, liquidity, risk premiums, and financial stability. To better understand these developments, we build on the Funds & Holdings database, which we compiled during the first funding period. This data allows us to refine our bond fragility indicator, improving our ability to assess risks in corporate bond markets. We also apply machine-learning models to estimate bond prices in real time. Since many corporate bonds trade infrequently, these models provide high-frequency price estimates, supporting risk assessment and enabling deeper analysis of market behavior. Another key focus is the impact of corporate bond ETFs on the bonds they hold. We analyze the role and decisions of Authorized Participants, who facilitate ETF trading and influence market liquidity. Finally, we develop a more advanced framework for studying bond intermediation. By moving beyond descriptive analysis and adopting a demand-systems framework, we account more precisely for the role of dealers and their influence on market dynamics.

• DFG Programme: Research Units
• Subproject of: FOR 5230: Financial Markets and Frictions - An Intermediary Asset Pricing Approach
• International Connection: Canada
• Cooperation Partner: Professorin Aleksandra Rzeznik, Ph.D.