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
December 8, 2013
Asian Finance Association (AsFA) 2013 Conference
This paper examines how liquidity and the heterogeneous liquidity preferences of investors interact to affect asset pricing. We use insurance firms' corporate bond holdings and measures of corporate bond illiquidity 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, we find empirical evidence for the effect of liquidity clientele on bond pricing--the liquidity premium is substantially attenuated among corporate bonds heavily held by investors with a penchant for illiquidity.
Number of Pages in PDF File: 56
Keywords: Liquidity Clientele Effect, Corporate Bond Illiquidity, Corporate Bond Holdings, Credit Risk
JEL Classification: G01, G12, G22, C23working papers series
Date posted: May 24, 2013 ; Last revised: December 9, 2013
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