Corporate Bond Liquidity Before and after the Onset of the Subprime Crisis

Abstract

We analyze liquidity components of corporate bond spreads by combining the superior data quality of transaction-level corporate bond prices available through TRACE with the unique natural experiment provided by the onset of the sub-prime crisis. We find that before the onset of the crisis, liquidity premia for the most liquid segment of investment grade bonds were small but they increased dramatically at the onset of the crisis. Among the liquidity proxies examined, the Amihud price-impact measure and a measure of transaction costs are the strongest drivers of liquidity both across rating and time. In contrast to earlier studies we find no positive relationship between the number of days a bond does not trade and the yield spread.

Keywords: Corporate bonds, Yield spreads, Liquidity, Subprime Crisis, TRACE

JEL Classification: G10, G12