Corporate Bond Multipliers: Substitutes Matter

Many economic questions require estimating the price impact of demand shifts in the bond market. In spite of corporate bonds having salient characteristics that distinguish close versus distant substitutes, existing estimates of corporate bond multipliers (the price increase in response to demand shifts) typically assume that all bonds, regardless of their characteristics, are equally good substitutes. In this paper, we show that accounting for the heterogeneous substitutability between bonds is critical for estimating multipliers. By allowing rich heterogeneous substitution patterns among bonds, we demonstrate that security-level multipliers are an order of magnitude smaller than previously estimated and are essentially zero. Nonetheless, aggregated portfolios exhibit substantially larger multipliers, reflecting the reduced availability of near substitutes for more aggregated portfolios. Furthermore, we find that the price impact reverts after a quarter, and that the multiplier is larger for high-yield bonds, longer-maturity bonds, and bonds with greater arbitrage risks.