Abstract

Does interconnectedness improve market quality? Yes.

We develop an alternative network structure, the assets network: assets are connected if they are held by the same investors. We use several large datasets to build the assets network for the corporate bond market. Through careful identification strategies based on the COVID-19 shock and “fallen angels,” we find that interconnectedness improves market quality, especially during stress periods. Our findings contribute to the debate on the role of interconnectedness in financial markets and show that highly interconnected corporate bonds allow for risk sharing and require a lower compensation for risk.