A new u.s. corporate bond index for the interwar period
ABSTRACT
This paper introduces a new corporate bond index for the United States covering January1919-December 1941. The index is in the form of monthly yields to maturity and bid-ask spreads on a sample of 20 long-term bonds taken from the Bank and Quotation Record of the Commercial and Financial Chronicle. One version of the index excludes bonds of bankrupt corporations; another version contains bonds that continued to trade actively after their issuers went into bankruptcy. The index thus provides a record of the yields and returns for a representative sample of the bond market during the interwar years. The index’s bid-ask spreads, moreover, provide a direct measure of liquidity shocks during that period. The paper provides examples on how the index can shed new light on monetary conditions during the Great Depression, including central bank lending policy, the stability of the demand for money, and the level of free reserves in the banking system — issues that are still important in financial markets that are under stress. Results suggest that bond market liquidity was important in bank decisions to borrow from the discount window (and necessary in understanding changes in Federal Reserve lending policy); not important in explaining the stability of the demand for money in time series data; and informative in explaining the buildup in free reserves in the 1930s and 1940s.
Brian Gendreau
University of Florida
Warrington College of Business
Department of Finance
Stuzin 308, PO Box 17168
Gainesville, FL 36611
352-846-0273
Brian.gendreau@warrington.ufl.edu