Bond Price Informativeness (with Nina Boyarchenko, Or Shachar, and Laura Veldkamp)
(Draft Available Upon Request) [contact me]
Abstract: We build a structural framework to estimate bond price informativeness. The skewness in bond payoff distributions moderates the expectations of bond market participants and leads to state-dependent risk aversion. We decompose the time-varying demand elasticity of bond investors into two components: information precision and state-dependent risk aversion. We find that, during the financial crisis, investors become not only extra risk averse because firms' financial prospect deteriorates but also less informed about the future. In contrast, during the COVID period, the decrease in demand elasticity is mostly driven by heightened effective risk aversion.