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Commonality in Credit Spread Changes: Dealer Inventory and Intermediary Distress

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  • Zhiguo He
  • Paymon Khorrami
  • Zhaogang Song

Abstract

Two intermediary-based factors—a corporate bond dealer inventory measure and a broad intermediary distress measure—explain more than 40 of the puzzling common variation in credit spread changes beyond canonical structural factors. A simple intermediary-based model with partial market segmentation accounts for intermediary factors’ explanatory power and delivers three further implications with empirical support. First, whereas bond sorts on risk-related variables produce monotonic loading patterns on intermediary factors, non-risk-related sorts produce no pattern. Second, dealer inventory comoves with corporate-credit assets only, whereas intermediary distress comoves with both corporate-credit and non-corporate-credit assets. Third, dealers’ inventory responds to (instrumented) bond sales by institutional investors.

Suggested Citation

  • Zhiguo He & Paymon Khorrami & Zhaogang Song, 2022. "Commonality in Credit Spread Changes: Dealer Inventory and Intermediary Distress," The Review of Financial Studies, Society for Financial Studies, vol. 35(10), pages 4630-4673.
    • Handle: RePEc:oup:rfinst:v:35:y:2022:i:10:p:4630-4673.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhac004
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    Cited by:

    1. Cotelioglu, Efe, 2024. "Do mutual funds and ETFs affect the commonality in liquidity of corporate bonds?," Journal of Empirical Finance, Elsevier, vol. 78(C).
    2. Bassi, Claudio & Behn, Markus & Grill, Michael & Waibel, Martin, 2024. "Window dressing of regulatory metrics: Evidence from repo markets," Journal of Financial Intermediation, Elsevier, vol. 58(C).
    3. Darrell Duffie & Michael Fleming & Frank Keane & Claire Nelson & Or Shachar & Peter Van Tassel, 2023. "Dealer capacity and US Treasury market functionality," BIS Working Papers 1138, Bank for International Settlements.
    4. Juan S. Mora-Sanguinetti & Cristina Peñasco & Rok Spruk, 2026. "The impact of “Green Regulation” on firms’ innovation," Working Papers 2611, Banco de España.
    5. He, Zhiguo & Nagel, Stefan & Song, Zhaogang, 2022. "Treasury inconvenience yields during the COVID-19 crisis," Journal of Financial Economics, Elsevier, vol. 143(1), pages 57-79.
    6. Jing-Zhi Huang & Bibo Liu & Zhan Shi, 2023. "Determinants of Short-Term Corporate Yield Spreads: Evidence from the Commercial Paper Market," Review of Finance, European Finance Association, vol. 27(2), pages 539-579.
    7. Heger, Julia & Min, Aleksey & Zagst, Rudi, 2024. "Analyzing credit spread changes using explainable artificial intelligence," International Review of Financial Analysis, Elsevier, vol. 94(C).
    8. Diego Bonelli, 2026. "Inflation risk and yield spread changes," Working Papers 2603, Banco de España.
    9. Chen, Xi & Wang, Junbo & Wu, Chunchi & Wu, Di, 2024. "Extreme illiquidity and cross-sectional corporate bond returns," Journal of Financial Markets, Elsevier, vol. 68(C).
    10. Niepmann, Friederike & Schmidt-Eisenlohr, Tim, 2023. "Institutional investors, the dollar, and U.S. credit conditions," Journal of Financial Economics, Elsevier, vol. 147(1), pages 198-220.
    11. Nicola Fusari & Wei Li & Haoyang Liu & Zhaogang Song, 2022. "Asset Pricing with Cohort‐Based Trading in MBS Markets," Journal of Finance, American Finance Association, vol. 77(6), pages 3249-3287, December.
    12. Thuy Duong Dang & Fabian Hollstein & Marcel Prokopczuk & Zhiguo He, 2023. "Which Factors for Corporate Bond Returns?," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 13(4), pages 615-652.
    13. DICKERSON, Alexander & NOZAWA, Yoshio & ROBOTTI, Cesare, 2025. "Factor Investing with Delays," Discussion Paper Series 771, Institute of Economic Research, Hitotsubashi University.
    14. Todd M. Hazelkorn & Tobias J. Moskowitz & Kaushik Vasudevan, 2023. "Beyond Basis Basics: Liquidity Demand and Deviations from the Law of One Price," Journal of Finance, American Finance Association, vol. 78(1), pages 301-345, February.
    15. Liu, Shuo, 2024. "Search friction, liquidity risk, and bond misallocation," Journal of Financial Markets, Elsevier, vol. 70(C).
    16. Huang, He & Qiu, Yancheng, 2025. "Does geopolitical risk raise or lower corporate credit spreads?," Economics Letters, Elsevier, vol. 247(C).
    17. Jiakai Chen & Haoyang Liu & Asani Sarkar & Zhaogang Song, 2020. "Dealers and the Dealer of Last Resort: Evidence from the Agency MBS Markets in the COVID-19 Crisis," Staff Reports 933, Federal Reserve Bank of New York.
    18. Sockin, Michael, 2025. "Informational frictions in funding and credit markets," Journal of Economic Theory, Elsevier, vol. 230(C).
    19. Oh, Byungmin & Park, Haerang & Joe, Denis Yongmin, 2024. "Determinants of credit default swap spread changes: The sell-side perspective," Finance Research Letters, Elsevier, vol. 61(C).
    20. deHaan, Ed & Li, Jiacui & Watts, Edward M., 2023. "Retail bond investors and credit ratings," Journal of Accounting and Economics, Elsevier, vol. 76(1).
    21. Pierre Collin‐Dufresne & Benjamin Junge & Anders B. Trolle, 2024. "How Integrated are Credit and Equity Markets? Evidence from Index Options," Journal of Finance, American Finance Association, vol. 79(2), pages 949-992, April.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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