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

61 Pages Posted: 21 Mar 2009 Last revised: 7 Jul 2011

Jens Dick-Nielsen

Copenhagen Business School - Department of Finance

Peter Feldhütter

London Business School

David Lando

Copenhagen Business School - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: May 31, 2011

Abstract

We analyze liquidity components of corporate bond spreads during 2005-2009 using a new robust illiquidity measure. The spread contribution from illiquidity increases dramatically with the onset of the subprime crisis. The increase is slow and persistent for investment grade bonds while the effect is stronger but more short-lived for speculative grade bonds. Bonds become less liquid when financial distress hits a lead underwriter and the liquidity of bonds issued by financial firms dries up under crises. During the subprime crisis, flight-to-quality is confined to AAA-rated bonds.

Keywords: Corporate bonds, Liquidity, Liquidity risk, Subprime crisis

JEL Classification: C23, G01, G12

Suggested Citation

Dick-Nielsen, Jens and Feldhütter, Peter and Lando, David, Corporate Bond Liquidity Before and After the Onset of the Subprime Crisis (May 31, 2011). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1364635 or http://dx.doi.org/10.2139/ssrn.1364635

Jens Dick-Nielsen (Contact Author)

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

Peter Feldhütter

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

David Lando

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark
+45 3815 3600 (Fax)

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