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http://ssrn.com/abstract=1104765
 
 

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Bond Illiquidity and Excess Volatility


Jack Bao


Ohio State University (OSU) - Department of Finance

Jun Pan


Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA); National Bureau of Economic Research (NBER); China Academy of Financial Research (CAFR)

May 9, 2013

AFA 2009 San Francisco Meetings Paper
Charles A. Dice Center Working Paper No. 2010-20; Fisher College of Business Working Paper No. 2010-03-020

Abstract:     
We find that the empirical volatilities of corporate bond and CDS returns are higher than implied by equity return volatilities and the Merton model. This excess volatility may arise because structural models inadequately capture either fundamentals or illiquidity. Our evidence supports the latter explanation. We find little relation between excess volatility and measures of firm fundamentals and the volatility of firm fundamentals, but some relation with variables proxying for time-varying illiquidity. Consistent with an illiquidity explanation, firm-level bond portfolio returns, which average out bond-specific effects, significantly decrease excess volatility.

Number of Pages in PDF File: 52

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Date posted: March 13, 2008 ; Last revised: May 19, 2013

Suggested Citation

Bao, Jack and Pan, Jun, Bond Illiquidity and Excess Volatility (May 9, 2013). AFA 2009 San Francisco Meetings Paper; Charles A. Dice Center Working Paper No. 2010-20; Fisher College of Business Working Paper No. 2010-03-020. Available at SSRN: http://ssrn.com/abstract=1104765 or http://dx.doi.org/10.2139/ssrn.1104765

Contact Information

Jack Bao
Ohio State University (OSU) - Department of Finance ( email )
2100 Neil Avenue
814 Fisher Hall
Columbus, OH 43210-1144
United States
Jun Pan (Contact Author)
Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA) ( email )
77 Massachusetts Avenue
Cambridge, MA 02139-4307
United States
617-253-3083 (Phone)
617-258-6855 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
China Academy of Financial Research (CAFR)
1954 Huashan Road
Shanghai P.R.China, 200030
China

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References:  27
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