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Liquidity Risk in the Corporate Bond Markets

George Chacko

Harvard Business School

January 15, 2005

A great deal of work has focused on market microstructure, but relatively little work has been devoted to the study of risk associated with liquidity. The work that has been done has almost exclusively focused on US equities - primarily because that market is fairly liquid and therefore data is plentiful. However, because that market is liquid, the empirical results been mixed. For our work, we use a unique database of US corporate bond transactions and holdings. Because the corporate bond market is several orders of magnitude more illiquid than the equity market, this seems a much more appropriate setting to study the effects of illiquidity. To get around the problem of a lack of trading (and therefore data), we construct a new measure of liquidity which does not require trading. Using this measure, we show that not only is liquidity risk priced, but that the effects of liquidity risk are quite pervasive and need to be controlled for carefully when doing virtually any analysis of security returns.

Number of Pages in PDF File: 47

Keywords: Liquidity, Corporate Bonds

JEL Classification: G12

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Date posted: March 18, 2005  

Suggested Citation

Chacko, George, Liquidity Risk in the Corporate Bond Markets (January 15, 2005). Available at SSRN: http://ssrn.com/abstract=687619 or http://dx.doi.org/10.2139/ssrn.687619

Contact Information

George Chacko (Contact Author)
Harvard Business School ( email )
Boston, MA 02163
United States
617-495-6884 (Phone)
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References:  32
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