Prof. Lorenzo Bretscher, HEC Lausanne
Asset Prices and the Real Economy
The overarching common theme in my research projects is the interaction of asset price movements and real economic activity. In particular, my research sheds light on when, how, and to what extent asset prices affect real activity or vice versa. Together with various co-authors, we have tackled these research questions from various vantage points. In the first part of my talk, I will briefly review some of the key ideas that I have contributed to this strand of the academic literature.
In the second part, I will discuss an ongoing research project entitled “Passive Demand and Active Supply: Evidence from Maturity-mandated Corporate Bond Funds” which highlights how the nature of corporate bond funds and their demand for specific bonds affects asset prices and, ultimately, the real economy by altering firm’s decision making. That is, in the paper, we identify a novel and common exogenous demand shock caused by passive funds in the corporate bond market. Specifically, passive fund demand for corporate bonds displays discontinuity around three maturity cutoffs. We then develop a novel identification strategy to study the impact of passive fund demand in the corporate bond market. First, we find that these non-fundamental demand shifts lead to a significant and lasting decrease in yield spreads, as well as persistent liquidity improvements. Second, passive fund demand shocks spill over to the primary market, causing lower issuing yield spreads, and firms engaging in debt market timing by substituting expensive bank debt with cheaper bond financing. We provide causal evidence that non-fundamental demand shocks can have real effects in that constrained firms use issuance proceeds to fund investment. Our findings inform the ongoing debate about the regulatory treatment of cross-trades between funds by the SEC.