Congratulations to Ph.D. candidate
@ZiangLi_
on his outstanding job market paper and subsequent award of the 2023 Ben Bernanke Prize in Financial and Monetary Economics!
Learn more about this award and Li's research:
@MarkusEconomist
I’m on the job market! Here is a thread on my job market paper, which looks at how long-term interest rates (e.g., 10-year Treasury yields) affect the corporate bond market.
Ziang Li’s (
@ZiangLi_
) job market paper examines how long-term interest rates affect corporate bond credit spreads. He finds that increases in long rates have led to declines in credit spreads after the 2007-2008 Financial Crisis.
I find that life insurers (largest bond investors, >30% market cap) are key contributors to this result. Post-2008, insurers start to face severe duration mismatch —> their market equity rises by over 7% when the 10y Treasury yield rises by 1%.
I build a quantitative model based on this mechanism that explains the observations. The model shows that unconventional monetary policy, such as QT, which raises long rates, has large unintended consequences in the bond market.
I provide causal identification using an exogenous discontinuity in bonds’ investor composition due to mutual fund investment mandates and confirm that spreads of bonds held more by insurers exhibit stronger responses to long rates.
It helps explain two striking market observations: (1) heightened credit spreads in the low-rate environment post-GFC and (2) tightening of credit spreads this year following the recent hiking cycle. (also in )
The channel has large real effects on bond issuance and firm investment -- new bond issuance is tilted towards speculative-grade bonds when rates are higher