Determinants of Corporate Bond Trading: A Comprehensive Analysis

Abstract

This paper studies the determinants of trading volume and liquidity of corporate bonds. Using transactions data from a comprehensive dataset of insurance company trades, our analysis covers more than 17,000 US corporate bonds of 4,151 companies over a five year period. The availability of transactions data allows us to study the effect of a variety of issue- and issuer-specific characteristics on liquidity. We find that the most economically important determinants of bond trading volume are the bond's issue size and age; trading volume declines substantially as bonds become seasoned and are absorbed into less active portfolios. We also examine the relationship between bond trading volume and activity in the issuer's stock. Our results show that bonds of companies with publicly traded equity are more likely to trade than those with private equity. Further, public companies with more active stocks have more actively traded bonds. Finally, we show that while the liquidity of high-yield bonds is more affected by credit risk, interest-rate risk is more important in determining the liquidity of investment-grade bonds.

Keywords: Institutional trading, liquidity, corporate bonds, NAIC

JEL Classification: G10, G20