A Global Liquidity Factor for Fixed Income Pricing

36 Pages Posted: 18 Dec 2008 Last revised: 12 Aug 2009

Date Written: June 13, 2009

Abstract

Liquidity premiums have been widely documented for equity and bond markets. However, there is a lack of easily implementable measures of systematic liquidity for bond markets, which are typically far less liquid. We show that a simple liquidity factor - based on the difference between corporate bond spreads and credit default swaps - is signifcantly associated with returns in a wide range of fixed income markets. The corresponding liquidity premium is time-varying but persistent and drives a fair amount of serial and cross-sectional variation in fixed income prices. Moreover, liquidity exposure varies predictably with maturity and credit rating suggesting a ight-to-quality phenomenon.

Keywords: Liquidity, Bond Market, Asset pricing, Factor Models

JEL Classification: G12, G15, G21

Suggested Citation

Gintschel, Andreas and Wiehenkamp, Christian, A Global Liquidity Factor for Fixed Income Pricing (June 13, 2009). Available at SSRN: https://ssrn.com/abstract=1316820 or http://dx.doi.org/10.2139/ssrn.1316820

Andreas Gintschel

JPMorgan ( email )

Junghofstrasse 14
Frankfurt, 60311
Germany
+49 69 7124 2195 (Phone)

Christian Wiehenkamp (Contact Author)

RiskLab GmbH

Seidlstr. 24-24a
Munich, 80335
Germany

HOME PAGE: http://www.risklab.com

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