Nonbank Fragility in Credit Markets : Evidence from a Two-Layer Asset Demand System

We develop a two-layer asset pricing framework to analyze the fragility of the corporate bond market. In the model, households allocate wealth to institutional investors such as mutual funds and insurance companies. Institutional investors then allocate funds to specific assets. Equilibrium asset prices reflect the demand of both households and institutional investors. Fragility arises when negative returns lead to investor redemptions, forcing managers to fire sale assets, leading to dynamic feedback loops between investor outflows and asset prices, as well as contagion across assets and institutions. We show how the model can be estimated using micro-data on bond prices, institutional investors holdings, and fund flows. We use the estimated model to quantify the equilibrium effects of unconventional monetary and liquidity policies on bond prices