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Dealer Inventory and the Cross-Section of Corporate Bond Returns

Author

Listed:
  • Friewald, Nils
  • Nagler, Florian

Abstract

Inventory models of dealership markets imply that intermediaries reduce their exposure to inventory risk by offering prices different from fundamental values. Therefore, inventory levels should affect asset prices and thus returns. We explore the cross-sectional relation between US corporate bond inventories and returns. Our findings provide strong support for the asset pricing implication of inventory models, that is, the risk-adjusted return of a high-minus-low inventory-sorted portfolio is 21 basis points per week. Furthermore, we examine several drivers of the inventory risk premium; for example, we emphasize the importance of inventory risk sharing in pricing bonds.

Suggested Citation

  • Friewald, Nils & Nagler, Florian, 2024. "Dealer Inventory and the Cross-Section of Corporate Bond Returns," CEPR Discussion Papers 19399, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:19399
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    Cited by:

    1. is not listed on IDEAS
    2. Chen, Steven Shu-Hsiu, 2024. "Volatility feedback and dealership position: Evidence from the CDS Index, Corporate Bonds, and Government Bonds," Finance Research Letters, Elsevier, vol. 69(PB).
    3. Mahyar Kargar & Benjamin Lester & Sébastien Plante & Pierre-Olivier Weill, 2023. "Sequential Search for Corporate Bonds," NBER Working Papers 31904, National Bureau of Economic Research, Inc.
    4. DICKERSON, Alexander & NOZAWA, Yoshio & ROBOTTI, Cesare, 2025. "Factor Investing with Delays," Discussion Paper Series 771, Institute of Economic Research, Hitotsubashi University.

    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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