Liquidity Premium in the Eye of the Beholder: An Analysis of the Clientele Effect in the Corporate Bond Market
Pennsylvania State University - University Park - Department of Finance
Siena College - School of Business
University of Iowa - Henry B. Tippie College of Business
University of Rhode Island - College of Business Administration
Asian Finance Association (AsFA) 2013 Conference
This paper examines how liquidity and investors' heterogeneous liquidity preferences interact to affect asset pricing. We construct measures of liquidity preferences using data on insurer corporate bond holdings, and find that investors' preferences are highly persistent over time and related to investment horizons and funding constraints. We provide evidence that investors vary widely in their preferences and, more importantly, evidence for liquidity clientele. Further, we find evidence that liquidity clienteles affect corporate bond prices --- specifically, both the level and volatility of liquidity premia are substantially attenuated among corporate bonds heavily held by investors with a weak preference for liquidity.
Number of Pages in PDF File: 59
Keywords: Corporate Bond Holdings, Liquidity Clientele, Corporate Bond Liquidity and Spreads
JEL Classification: G01, G12, G22, C23
Date posted: May 24, 2013 ; Last revised: September 11, 2014
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