Working Papers

The SOFR Discount

With Olav Syrstad (This version: March 2024)

Featured in Risk Magazine

Abstract: The transition from London Interbank Offered Rate (LIBOR) to Secured Overnight Financing Rate (SOFR) affects the reference rate of floating-rate debt worth trillions of dollars. We provide the first evidence highlighting a benefit of the benchmark transition for debt markets. Focusing on the primary market for dollar-denominated floating-rate notes (FRNs), we compare the issuance spreads of FRNs linked to LIBOR and SOFR, issued by the same entity during the same month. After adjusting for maturity-matched spreads from derivatives markets, we find significantly lower spreads for SOFR-linked FRNs. We link this SOFR discount to the enhanced price stability of SOFR-linked FRNs.

Pension Liquidity Risk

With Kristy Jansen, Angelo Ranaldo, and Patty Duijm (This version: February 2024)

Featured by IPE; Inquire Grant

Abstract: Pension funds are increasingly relying on swaps to hedge the long-term nature of their liabilities. While the use of swaps reduces pension funds' exposure to interest rate risk, it exposes pension funds to liquidity risk because of potential margin calls. We study these effects using unique data for the Dutch pension system and show that hedging behavior exposes pension funds to margin call risk that can be as large as 7-19% of total assets under management. When interest rates hike and this risk materializes, pension funds liquidate parts of their fixed income portfolios, primarily selling safe government bonds. This procyclical selling behavior has an adverse impact on bond prices.

Taking advantage of media attention to climate change: CLOs‘ trading of brown loans

With Kathrin Hackenberg, Viktoria Klaus, and Talina Sondershaus (This version: January 2024)

Abstract: Collateralized Loan Obligations (CLOs) are the main investors in leveraged loans, and we show in this paper that they take advantage of heightened media attention to climate change. Utilizing transaction data on leveraged loans, we find loans of firms in carbon-intensive industries trade at a discount when media attention to climate change is elevated. CLOs take advantage of these price discounts by tilting their portfolios toward carbon-intensive industries. This portfolio tilting is still present for CLO managers who signed the principles of responsible investing (PRI) and thereby committed to considering environmental factors in their investments. Hence, CLOs are one investor class purchasing from institutional investors who divest from brown industries.

Corporate Pension Risk Transfers

With Suresh Sundaresan and Michael Moran (This Version: December 2022)

Abstract: Between 2012 and 2022, U.S. corporate sponsors of defined benefit (DB) pension plans used pension risk transfers (PRTs) to transfer more than $150 billion pension obligations to insurance companies, thereby reducing the pool of corporate DB plan participants by 10%. We assemble a new PRT database and study the drivers and consequences of PRTs. Consistent with a simple model, the propensity to conduct a PRT is higher for firms with higher flow-through costs from their pension plans and higher burdens for paying insurance premiums to the Pension Benefit Guarantee Corporation (PBGC). Safer plan sponsors with less default risk and less volatility in their pension assets are more likely to conduct PRTs thereby increasing PBGC's pool risk.

Disclosing the Undisclosed: Commercial Paper as Hidden Liquidity Buffers

With Olav Syrstad - New version (December 20, 2022)

This paper subsumes our old working paper "Cash is Not King: Evidence from the Commercial Paper Market"

Abstract: Using new transaction-level data for non-financial commercial paper (CP) in the U.S., we show that companies systematically reduce their outstanding short-term debt on quarterly and annual disclosure dates. Constraints on CP lending supply cannot explain this pattern. Instead, companies optimize their disclosed liquidity buffers and strategically repay CP debt if doing so strengthens common accounting ratios, such as the current ratio. Unlike other CP issuers, firms that repay their CP debt neither hold lower cash buffers nor use CP as bridge financing, suggesting an alternative role of CP debt as “hidden liquidity buffer”.