Liquidity Risk in the Corporate Bond Markets
47 Pages Posted: 18 Mar 2005
Date Written: January 15, 2005
Abstract
A great deal of work has focused on market microstructure, but relatively little work has been devoted to the study of risk associated with liquidity. The work that has been done has almost exclusively focused on US equities - primarily because that market is fairly liquid and therefore data is plentiful. However, because that market is liquid, the empirical results been mixed. For our work, we use a unique database of US corporate bond transactions and holdings. Because the corporate bond market is several orders of magnitude more illiquid than the equity market, this seems a much more appropriate setting to study the effects of illiquidity. To get around the problem of a lack of trading (and therefore data), we construct a new measure of liquidity which does not require trading. Using this measure, we show that not only is liquidity risk priced, but that the effects of liquidity risk are quite pervasive and need to be controlled for carefully when doing virtually any analysis of security returns.
Keywords: Liquidity, Corporate Bonds
JEL Classification: G12
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Illiquidity and Stock Returns: Cross-Section and Time-Series Effects
By Yakov Amihud
-
Illiquidity and Stock Returns: Cross-Section and Time-Series Effects
By Yakov Amihud
-
Liquidity Risk and Expected Stock Returns
By Lubos Pastor and Robert F. Stambaugh
-
Liquidity Risk and Expected Stock Returns
By Lubos Pastor and Robert F. Stambaugh
-
Liquidity Risk and Expected Stock Returns
By Lubos Pastor and Robert F. Stambaugh
-
Is Information Risk a Determinant of Asset Returns?
By David Easley, Soeren Hvidkjaer, ...
-
By Tarun Chordia, Avanidhar Subrahmanyam, ...
-
Common Factors in Prices, Order Flows and Liquidity
By Joel Hasbrouck and Duane J. Seppi
-
Common Factors in Prices, Order Flows and Liquidity
By Joel Hasbrouck and Duane J. Seppi