Rollover Risk and Corporate Bond Spreads

Abstract

Using a novel data set and new proxies for rollover risk and market illiquidity, this paper examines whether rollover risk is priced on corporate bonds. The empirical analysis developed in this paper reveals that market illiquidity affects corporate bond spreads beyond a liquidity premium through a “rollover risk channel”. This effect is statistically significant and financially important, particularly in speculative bonds and in bonds issued by financial corporations. The results are significant even after controlling by a powerful set of variables and non-linear effects, and they are robust to alternative proxies of market illiquidity, bond and time fixed effects and potential endogeneity bias.

Keywords: credit spreads, rollover risk, market liquidity, default risk, flight to quality

JEL Classification: G12, G13, G15, G32, G33