Internal Liquidity Risk in Corporate Bond Yield Spreads: Bond- and Market-Level Evidences

64 Pages Posted: 18 Mar 2009 Last revised: 5 Sep 2010

See all articles by Hsien-Hsing Liao

Hsien-Hsing Liao

National Taiwan University

Tsung-Kang Chen

National Chiao Tung University

tsai pei-ling

affiliation not provided to SSRN

Date Written: January 12, 2009

Abstract

The recent global financial crisis reveals the important role of internal liquidity risk in corporate credit risk. However, hardly have any existing studies investigated its effects on bond yield spreads. This study employs both bond- and market-level data to address the issue. Bond-level results show that corporate internal liquidity volatility significantly impacts bond yield spreads when controlling for well-known variables, traditional accounting measures of corporate debt servicing ability and an additional structural form credit risk measure (the cash flow volatility). Further, this study finds that a systematic internal liquidity risk factor can materially capture market-wide bond yield spread changes. Market-level results also show that market-level internal liquidity risk significantly explains the spreads of bond indexes when controlling for factors of bond and equity markets and other major macro state variables. We conclude that internal liquidity risk should be incorporated into bond yield spread modeling.

Keywords: Flow-based credit risk, Internal liquidity risk, Bond yield spreads

JEL Classification: G10, G30

Suggested Citation

Liao, Hsien-Hsing and Chen, Tsung-Kang and pei-ling, tsai, Internal Liquidity Risk in Corporate Bond Yield Spreads: Bond- and Market-Level Evidences (January 12, 2009). Available at SSRN: https://ssrn.com/abstract=1362409 or http://dx.doi.org/10.2139/ssrn.1362409

Hsien-Hsing Liao (Contact Author)

National Taiwan University ( email )

1 Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

Tsung-Kang Chen

National Chiao Tung University ( email )

No. 1001, Dasyue Rd., East Dist.,
Hsinchu City, 300
Taiwan

Tsai Pei-ling

affiliation not provided to SSRN ( email )

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