Crowded Ratings: Clientele Effects in the Corporate Bond Market

61 Pages Posted: 28 Nov 2020 Last revised: 1 Sep 2021

See all articles by Francisco Gomes

Francisco Gomes

London Business School

Ryan Lewis

University of Colorado, Boulder

Jordan Nickerson

University of Washington - Department of Finance and Business Economics

Date Written: August 2021

Abstract

Consistent with a simple model of market segmentation, we document rating-based clientele effects in the corporate bond market. Supply shocks arising from idiosyncratic firm upgrades and downgrades cause significant price movements for the other bonds in both the affected rating bucket and nearby buckets. This effect is not driven by changes in risk and is persistent, with an approximate half-life of five months. Guided by the model, these results shed light on the demand price elasticity, the degree of rating-based market segmentation, and the speed of adjustment for arbitrage capital, all in the context of the corporate bond market.

Keywords: credit ratings, clientele effects, corporate bond pricing, market segmentation

JEL Classification: G11, G12, G14, G24, G4

Suggested Citation

Gomes, Francisco and Lewis, Ryan and Nickerson, Jordan, Crowded Ratings: Clientele Effects in the Corporate Bond Market (August 2021). Available at SSRN: https://ssrn.com/abstract=3707588 or http://dx.doi.org/10.2139/ssrn.3707588

Francisco Gomes

London Business School ( email )

Finance Department
Sussex Place - Regent's Park
London NW1 4SA
United Kingdom

HOME PAGE: http://sites.google.com/view/francisco-gomes/home

Ryan Lewis

University of Colorado, Boulder ( email )

Boulder, CO 80309-0419
United States

Jordan Nickerson (Contact Author)

University of Washington - Department of Finance and Business Economics ( email )

Box 353200
Seattle, WA 98195
United States

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