Exorbitant Privilege? Quantitative Easing and the Bond Market Subsidy of Prospective Fallen Angels

We thank Ed Altman, Jennie Bai, Antonio Falato, Quirin Fleckenstein, Victoria Ivashina, Kose John, Jane (Jian) Li, Francis Longstaff, Camelia Minoiu, Andrea Presbitero, and Tyler Muir for their comments. We also thank seminar and conference participants at the NBER Summer Institute Capital Markets and the Economy, AFA Annual Meetings, Cornell, Oxford Said–ETH Zurich Macro-finance Conference, 10th MoFiR Workshop on Banking, KAIST, Deutsche Bundesbank/FRIC/CEPR \Credit Risk over the Business Cycle" conference, FSB Systemic Risks in Non-Bank Financial Intermediation conference, 2021 Federal Reserve Stress Testing Research conference, Bank of Spain, NYU Shanghai Joint-School Macro/Finance Seminar, NYU Stern, Cornell, Korea University Business School, KU Leuven, University of Melbourne, Norges Bank, Erasmus Rotterdam, University of South Carolina, New York Fed, University of Bonn, Humboldt University, ESADE Spring Workshop, and the BIS for valuable comments. We thank Erica Bucchieri and William Arnesen for excellent research assistance. The views expressed in this paper are those of the authors and do not necessarily represent those of the Federal Reserve Bank of New York, the Federal Reserve System, the BIS, or any of their staff. A previous version of this paper circulated with the title “Exorbitant Privilege? The Bond Market Subsidy of Prospective Fallen Angels.” The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

• February 15, 2022