Abstract

http://ssrn.com/abstract=1106852
 
 

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Liquidity of Corporate Bonds


Jack Bao


Board of Governors of the Federal Reserve System (FRB)

Jun Pan


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

Jiang Wang


MIT; China Academy of Financial Research (CAFR); National Bureau of Economic Research (NBER)

July 9, 2008


Abstract:     
This paper examines the liquidity of corporate bonds and its asset-pricing implications using a novel measure of illiquidity based on the magnitude of transitory price movements. Using transaction-level data for a broad cross-section of corporate bonds from 2003 through 2007, we find the illiquidity in corporate bonds to be significant, substantially greater than what can be explained by bid-ask bounce, and closely linked to liquidity-related bond characteristics. More importantly, we find a strong commonality in the time variation of bond illiquidity, which rises sharply during market crises and reaches an all-time high during the recent sub-prime mortgage crisis. Monthly changes in this aggregate bond illiquidity are strongly related to changes in the CBOE VIX Index and lagged stock market returns. Examining its relation with bond pricing, we find that our measure of illiquidity explains the cross-sectional variation in average bond yield spreads with large economic significance.

Number of Pages in PDF File: 40

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Date posted: March 25, 2008 ; Last revised: September 11, 2009

Suggested Citation

Bao, Jack and Pan, Jun and Wang, Jiang, Liquidity of Corporate Bonds (July 9, 2008). Available at SSRN: http://ssrn.com/abstract=1106852 or http://dx.doi.org/10.2139/ssrn.1106852

Contact Information

Jack Bao
Board of Governors of the Federal Reserve System (FRB) ( email )
20th Street and Constitution Avenue NW
Washington, DC 20551
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

Jiang Wang
MIT ( email )
E62-614
100 Main Street
Cambridge, MA 02142
United States
617-253-2632 (Phone)
617-258-6855 (Fax)
China Academy of Financial Research (CAFR)
1954 Huashan Road
Shanghai P.R.China, 200030
China

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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