A Fast Literature Search Engine based on top-quality journals, by Dr. Mingze Gao.

• Li, J. (2022). Endogenous Inattention and Risk Specific Price Underreaction in Corporate Bonds. Journal of Financial Economics, 145, 595–615.

  Corporate bond prices are slow to respond to default risk and interest rate shocks, as proxied by firm-level stock returns and Treasury returns, respectively. Furthermore, the underreaction is risk-specific: bonds with better credit quality underreact more to default risk, while those with worse quality underreact more to interest rates. The underreactions imply substantial out-of-sample return predictability, and investors appear to be leaving too much money on the table. The results are consistent with behavioral inattention models in which investors endogenously allocate more attention to payoff-relevant (or salient) risks, and they are not explained by traditional trading friction mechanisms.

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• Ma, Y., Xiao, K., & Zeng, Y. (2022). Mutual Fund Liquidity Transformation and Reverse Flight to Liquidity. Review of Financial Studies, 35, 4674–4711.

  We identify fixed-income mutual funds as an important contributor to the unusually high selling pressure in liquid asset markets during the COVID-19 crisis. We show that mutual funds experienced pronounced investor outflows amplified by their liquidity transformation. In meeting redemptions, funds followed a pecking order by first selling their liquid assets, including Treasuries and high-quality corporate bonds, which generated the most concentrated selling pressure in these markets. Overall, the estimated price impact of mutual funds was sizable at a third of the increase in Treasury yields and a quarter of the increase in corporate bond yields during the COVID-19 crisis.

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• Maurin, V. (2022). Liquidity Fluctuations in Over‐the‐counter Markets. The Journal of Finance, 77, 1325–1369.

  This paper proposes a theory of excess price fluctuations in over‐the‐counter secondary markets. When heterogeneous assets trade under asymmetric information, a quality effect emerges: high liquidity lowers the quality of the pool of sellers and decreases future liquidity. Cyclical equilibria can arise even without fundamental shocks. In a cycle, investors speculate by bidding up the price of low‐quality assets, anticipating a high resale price at the peak. When this resale effect is strong, cycles disappear and multiple steady states coexist with different levels of liquidity. The model rationalizes empirical patterns for corporate bonds and housing in particular.

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• Moench, E., & Soofi-Siavash, S. (2022). What Moves Treasury Yields. Journal of Financial Economics, 146, 1016–1043.

  We identify a yield news shock as an innovation that does not move Treasury yields contemporaneously but explains a maximum share of their future variation. Yields do not immediately respond to the news shock as the initial reaction of term premiums and expected short rates offset each other. While the impact on term premiums fades quickly, expected short rates and thus yields decline persistently. As a result, the shock explains a staggering 50% of Treasury yield variation several years out. A positive yield news shock is associated with a coincident sharp increase in stock and bond market volatility, a contemporaneous response of leading economic indicators, and is followed by a persistent decline of real activity and inflation which is accommodated by the Federal Reserve. Identified shocks to realized stock market volatility and business cycle news imply similar impulse responses and together capture the bulk of variation of the yield news shock.

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• Nawalkha, S. K., & Zhuo, X. (2022). A Theory of Equivalent Expectation Measures for Contingent Claim Returns. The Journal of Finance, 77, 2853–2906.

  This paper introduces a dynamic change of measure approach for computing analytical solutions of expected future prices (and therefore, expected returns) of contingent claims over a finite horizon. The new approach constructs hybrid probability measures called equivalent expectation measures (EEMs) that provide the physical expectation of the claim's future price before the horizon date, and serve as pricing measures on or after the horizon date. The EEM theory can be used for empirical investigations of both the cross‐section and the term structure of returns of contingent claims, such as Treasury bonds, corporate bonds, and financial derivatives.

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• Nguyen, T. T. (2022). Public Debt, Consumption Growth, and the Slope of the Term Structure. Review of Financial Studies, 35, 3742–3776.

  The debt-to-GDP ratio negatively predicts cumulative nominal consumption growth up to a 10-year horizon, resulting from the ratio’s ability to forecast lower inflation and real growth. Moreover, the debt-to-GDP ratio is positively associated with yield spreads. I rationalize these facts in a model in which positive shocks to government debt cause lower inflation and growth, making bonds attractive assets. Furthermore, because longer-term bonds are less exposed to current debt shock than are shorter-term bonds, they are better hedges, resulting in high yield spreads in high-debt states. The model highlights the importance of fiscal risk in understanding the Treasury bond market.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

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• Pflueger, C., & Rinaldi, G. (2022). Why Does the Fed Move Markets so Much a Model of Monetary Policy and Time Varying Risk Aversion. Journal of Financial Economics, 146, 71–89.

  We show that endogenous variation in risk aversion over the business cycle can jointly explain financial market responses to high-frequency monetary policy shocks with standard asset pricing moments. We newly integrate a work-horse New Keynesian model with countercyclical risk aversion via habit formation preferences. In the model, a surprise increase in the policy rate lowers consumption relative to habit, raising risk aversion. Endogenously time-varying risk aversion in the model is crucial to explain the large fall in the stock market, the cross-section of industry returns, and the increase in long-term bond yields in response to a surprise policy rate increase.

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• Reichenbacher, M., & Schuster, P. (2022). Size Adapted Bond Liquidity Measures and Their Asset Pricing Implications. Journal of Financial Economics, 146, 425–443.

  We develop new liquidity measures for bond markets. Existing measures suffer from the combination of two effects. First, transaction costs in OTC markets strongly depend on trade size. Second, many bonds trade only scarcely with strongly differing trading volumes. Therefore, changes in average transaction costs often indicate changing trade sizes rather than changing liquidity. We combine full-sample information for the size-cost relation with individual transaction data to eliminate such measurement problems. We find that size-adapted measures make a difference when analyzing liquidity dynamics in the U.S. corporate bond market, liquidity differences between bonds, and the asset pricing implications of liquidity.

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• Sambalaibat, B. (2022). A Theory of Liquidity Spillover between Bond and CDS Markets. Review of Financial Studies, 35, 2525–2569.

  I build a search model of bond and credit default swap (CDS) markets with endogenous investor participation and show that shorting bonds through CDS increases the liquidity and price of bonds. By allowing investors to trade the credit risk of bonds without trading the bonds, CDS introduction expands the set of feasible trades and attracts investors into the credit market. Because search is nondirected within the credit market, new investors also trade bonds and consequently increase their price and liquidity. My results suggest that naked CDS bans increased sovereigns’ borrowing costs and thereby exacerbated the 2010–2012 European debt crisis.

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• Alex Zhou, X., & O’Hara, M. (2021). The Electronic Evolution of Corporate Bond Dealers. Journal of Financial Economics, 140, 368–390.

  Technology transformed the trading of financial assets but has been slower to come to corporate bond trading. Combining proprietary data from MarketAxess with regulatory TRACE data, we investigate how electronic request for quote (RFQ) trading affects bond dealers and trading more generally. We demonstrate that electronic trading remains fairly small and segmented, but has wide-ranging effects on transaction costs and execution quality in both electronic and voice trading, and the interdealer market. We identify features particular to bond markets that have and could continue to limit electronic bond trading growth. We provide an intriguing portrait of a market in transition.

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