Manav Chaudhary

Corporate Bond Multipliers: Substitutes Matter
R&R at  Review of Financial Studies
(with Zhiyu Fu and Jian Li)

Many economic questions require estimating the price impact of demand shifts (multipliers) in the bond market. Corporate bonds have salient characteristics that distinguish close versus distant substitutes. We show that accounting for the heterogeneous substitutability between bonds is critical for estimating multipliers correctly. By allowing for heterogeneous substitution, we find that security-level multipliers are essentially zero—an order of magnitude smaller than the estimate ignoring heterogeneous substitutability. Nonetheless, portfolio multipliers are substantially larger and monotonically increase with the aggregation level. Furthermore, we find that the multiplier is larger for high-yield bonds, longer-maturity bonds, and bonds with greater arbitrage risks.

• Presentations: AFA 2024, AFFECT 2023, Columbia Business School, EFA 2024, EPFL, HKUST, LBS's TADC, MFA 2024, NBER SI Asset Pricing 2023, UCLA's David Backus Memorial Conference, University of Chicago, University of Minnesota, and Yiran Fan Memorial Conference

• Awards: TADC’s AQR Asset Management Institute Prize for best economics paper

Regulator Beliefs

Modern financial regulations are forward-looking and operationally rely on regulator models to forecast future outcomes. As a result, through these models, regulations embed views about the future, which I term regulator beliefs. Using the US life insurance sector, I measure regulator and insurer interest rate expectations. Deriving regulator expectations from the economic model they prescribe for risk-based capital and policy reserve calculations, and gathering insurer expectations from investor call transcripts using a large language model. I document three stylized facts: (i) Regulators and insurers disagree about future yields, with disagreement exceeding 2pp for long-horizon expectations; (ii) Regulator expectations missed the decline in yields, but they predict future yields just as, if not more, accurately as professional forecasters and insurers; and (iii) Regulators and professional forecasters exhibit quantitatively similar belief-updating patterns, such as underreacting to new information. In line with large disagreements, I show that regulator expectations induce insurers to adjust their actions materially. Two quasi-experiments confirm that insurers rebalance portfolios to align with regulator expectations—adjusting portfolio duration by over 15%. Furthermore, insurers shift their reported expectations to be more aligned with the regulator—highlighting the need to consider the regulatory environment when interpreting institutional investors' reported beliefs. Finally, I extend the analysis to banks, demonstrating that shifts in Federal Reserve beliefs, due to their influence on stress test design, cause banks to adjust their capital allocations. Overall, the findings lay the groundwork for a broader agenda connecting regulator beliefs to financial institution decisions, asset prices, and financial stability.

• Presentations: Boston College, Colorado Finance Summit, Cornell, HBS Finance, HBS BGIE, Imperial College, LBS, LSE, OSU, University of Chicago, UC Boulder, USC, and University of Toronto

• Awards: Colorado Finance Summit Best Job Market Paper Award

Anatomy of the Treasury Market: Who Moves Yields?
(with Zhiyu Fu and Haonan Zhou)

We develop an empirically tractable model of the U.S. Treasury market that incorporates investors’ heterogeneous demand shocks and their responses to macroeconomic factors in determining equilibrium yields. Our estimated model enables us to (i) quantify investors' sensitivities to yields and factors, (ii) decompose yield movements by investors, and (iii) analyze investor responses during specific economic episodes. First, investor demand and factor sensitivities vary significantly across sectors and market conditions, with the overall market being quite inelastic. Second, decomposing yield drivers reveals a structural shift since the financial crisis: Before 2008, foreign investors were the primary drivers of yields, but their influence has declined markedly since then, while the Federal Reserve has stepped in as a state-contingent liquidity provider. Third, contrary to conventional wisdom, we find that foreign investors do not exhibit flight-to-safety behavior for Treasuries during market turmoil; instead, domestic investors drive the countercyclical movement of Treasury prices.

• Presentations: Bank of Korea, Brown University, CUHK Shenzhen, HBS Junior Finance Conference, HKU, HKUST, Peking University, University of Chicago Treasury Conference, University of Zurich, WashU Olin.

Inflation Expectations and Stock Returns
(with Ben Marrow)

How do inflation expectations affect stock returns, and what accounts for this relationship? We directly measure investors' expectations using traded inflation-indexed contracts and show that, post-2000, stocks offer positive returns in response to higher expected inflation: unconditionally, a 10 basis point increase in 10-year breakeven inflation is associated with a 1.1% increase in the value-weighted stock index. Using a wide range of approaches, we show that this positive relationship is almost entirely due to aggregate variations in expected excess returns rather than changes in firm cash flows (e.g., due to higher mark-ups) or fluctuations in risk-free rates (e.g., due to expected monetary policy response). Overall, a risk premium “proxy” mechanism appears to explain this dominant role of expected excess returns: higher long-term inflation expectations signal stronger future economic growth and reduced volatility.

• Presentations: LBS's TADC, University of Chicago, Yiran Fan Memorial Conference (poster), CCSRG, Inter-finance PhD Seminar

• Awards: TADC’s AQR Asset Management Institute prize for best finance paper, Yiran Fan Memorial prize for best third year paper