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 Model-Implied Beliefs

Modern financial regulations rely on forecasts from regulator-controlled economic models, resulting in regulatory constraints shaped by regulator model-implied beliefs. Using the US life insurance sector as a laboratory, I show these beliefs exhibit commonly documented systematic patterns, and significantly passthrough into intermediary actions through their impact on regulatory constraints. I derive regulator expectations from the economic models they prescribe for risk-based capital and policy reserve calculations, and gather 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 model-implied expectations missed the decline in yields but predict future yields as accurately as, if not more accurately than, 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 the large disagreements, I show that regulator model-implied expectations, through regulatory constraints, induce insurers to adjust their actions materially. Two quasi-experiments confirm that insurers rebalance portfolios to align with regulator model-implied expectations, adjusting portfolio duration by over 15%. Furthermore, insurers shift their reported expectations to be more consistent with those embedded in regulatory models, highlighting the need to consider the regulatory environment when interpreting institutional investors' reported beliefs.

• 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