Working Paper: CEPR ID: DP18482
Authors: Friedrich Baumann; Dmitry Livdan; Ali Kakhbod; Abdolreza Nazemi; Norman Schurhoff
Abstract: We examine the trading and pricing of defaulted U.S. corporate bonds. Defaulted bonds are actively traded since the bonds’ natural holders change from buy-and-hold to specialized vulture investors. We document that intermediation after default shifts to dealers with prior expertise in the defaulted bond. These primary dealers locate higher-valuation counterparties in longer intermediation chains and absorb more order flow in their inventory than other dealers. The switch to trading with primary dealers raises recovery rates by 8%. Our results highlight the importance of dealers’ expertise in intermediating specific corporate bonds which stabilizes market functioning and lowers credit risk ex-ante.
Keywords: corporate default; corporate bonds; recovery rates; over-the-counter markets; dealer networks
JEL Codes: G12; G14; G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dealer selection (L81) | recovery rates (G33) |
| intermediation process with primary dealers (G24) | market functioning for defaulted bonds (G33) |
| trading with primary dealers (F33) | credit risk ex-ante (G21) |
| trading with primary dealers (F33) | recovery rates (G33) |