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An Asset Pricing Approach to Liquidity Effects in Corporate Bond Markets

65 Pages Posted: 23 Apr 2011 Last revised: 14 Mar 2012

Dion Bongaerts

Erasmus University Rotterdam (EUR) - Finance

Frank De Jong

Tilburg University - Department of Finance

Joost Driessen

Tilburg University - Department of Finance; CentER Tilburg University

Multiple version iconThere are 2 versions of this paper

Date Written: March 12, 2012

Abstract

We use an asset pricing approach to compare the effects of expected liquidity and liquidity risk on expected U.S. corporate bond returns. Liquidity measures are constructed for bond portfolios using a Bayesian approach to estimate Roll’s measure. The results show that expected bond liquidity and exposure to equity market liquidity risk affect expected bond returns, and that these liquidity effects explain a substantial part of the credit spread puzzle. In contrast, we find robust evidence that exposure to corporate bond liquidity shocks carries an economically negligible risk premium. We develop a simple theoretical model that can explain this finding.

Keywords: Liquidity premium, liquidity risk, corporate bonds, credit spread puzzle

JEL Classification: C51, G12, G13

Suggested Citation

Bongaerts, Dion and De Jong, Frank and Driessen, Joost, An Asset Pricing Approach to Liquidity Effects in Corporate Bond Markets (March 12, 2012). Available at SSRN: https://ssrn.com/abstract=1762564 or http://dx.doi.org/10.2139/ssrn.1762564

Dion Bongaerts

Erasmus University Rotterdam (EUR) - Finance ( email )

Burgemeester Oudlaan 50
Rotterdam, 3062PA
Netherlands
+31 (0) 10 40 82 790 (Phone)
+31 (0) 10 40 89 017 (Fax)

HOME PAGE: http://www.rsm.nl/portal/page/portal/home/faculty/academic_departments/finance/faculty_and_staff/fac

Frank De Jong (Contact Author)

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Joost Driessen

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

CentER Tilburg University ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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