Working Papers

Liquidity, Credit Spreads, and Monetary Policy Shocks: Evidence from the U.S. Corporate Bond Market

(with Yuki Sato)

Very preliminary. Most recent draft: March 2025. [Link]

This paper examines the interplay between corporate bond liquidity and monetary policy in determining credit spreads dynamics. Using intraday transaction-level data from the Trade Reporting and Compliance Engine (TRACE), we construct comprehensive liquidity measures—including bid-ask spreads and turnover ratios—to assess their contribution to credit spreads. Using high-frequency identified shocks for Gurkaynak et al. (2005) and Nakamura and Steinsson (2018), we document that the credit spread for less liquid bonds increases by more as a consequence of a monetary tightening. Hence we proceed to identifying the liquidity channel of monetary policy on corporate bond spread by adopting a two-step procedure: first we compute the responses of liquidity measures to the shocks, and then use the fitted values in a second local projection regression to compute the responses of credit spreads. Lastly, we show that the loading of the liquidity risk factor varies over time and strongly anti-correlates with the slope of the yield curve, suggesting a higher-order nonlinear effect of the liquidity channel.

The Interaction of Capital Constraints and Financial Volatility

Job Market Paper. Most Recent Draft: November 2024. [Link]

Abstract

This paper presents new evidence on how the countercyclicality of excess returns is driven by the interaction between the financial sector’s balance sheet conditions and uncertainty shocks. Using a nonlinear specification of the local projection method to estimate impulse response functions, I find that the effects of shocks to various volatility indices—both on excess returns and real economic variables—are significantly amplified when the financial sector’s balance sheet has weakened prior to the shock. These empirical findings are replicated by a macro-finance general equilibrium model that incorporates a financial sector subject to an occasionally binding constraint. The model introduces a novel source of uncertainty, modeled as a stochastic component affecting the total external funding available to financial intermediaries, consistent with real-world observations. When this "financial uncertainty" increases, it raises the likelihood that intermediaries’ financial constraints will bind, triggering precautionary deleveraging. This, in turn, leads to a surge in excess returns and a decline in economic activity, effects that grow in magnitude as the economy moves closer to the constraint.

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