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An Asset Pricing Approach to Liquidity Effects in Corporate Bond MarketsDion BongaertsErasmus University Rotterdam (EUR) - Finance Frank De JongTilburg University - Department of Finance Joost DriessenTilburg University - Department of Finance; CentER Tilburg University March 12, 2012 Abstract: We use an asset pricing approach to compare the effects of expected liquidity and liquidity risk on expected U.S. corporate bond returns. Liquidity measures are constructed for bond portfolios using a Bayesian approach to estimate Roll’s measure. The results show that expected bond liquidity and exposure to equity market liquidity risk affect expected bond returns, and that these liquidity effects explain a substantial part of the credit spread puzzle. In contrast, we find robust evidence that exposure to corporate bond liquidity shocks carries an economically negligible risk premium. We develop a simple theoretical model that can explain this finding.
Number of Pages in PDF File: 65 Keywords: Liquidity premium, liquidity risk, corporate bonds, credit spread puzzle JEL Classification: C51, G12, G13 working papers seriesDate posted: April 23, 2011 ; Last revised: March 14, 2012Suggested CitationContact Information
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