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 the heterogeneous liquidity preferences of investors interact to affect asset pricing, known as the liquidity clientele effect. We use detailed corporate bond holdings by insurance firms as well as measures of corporate bond liquidity to quantify investors' liquidity preference. We find a wide dispersion of liquidity preference across investors. Such liquidity preferences persist over time and, importantly, are related to characteristics associated with investment horizons. Further, among corporate bonds heavily held by investors with strong preference for liquidity, there is a strong liquidity premium effect - namely, bonds with higher illiquidity command higher yield spreads; however, the liquidity premium is substantially lower among bonds heavily held by investors with a penchant for illiquidity. Our findings provide support to the liquidity clientele effect, a long-standing conjecture in the asset pricing theory of liquidity.
Number of Pages in PDF File: 56working papers series
Date posted: May 24, 2013 ; Last revised: October 13, 2013
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