Dynamic Effects of Idiosyncratic Volatility and Liquidity on Corporate Bond Spreads

Posted: 1 Aug 2011 Last revised: 4 Jun 2013

See all articles by Madhu Kalimipalli

Madhu Kalimipalli

Lazaridis School of Business and Economics, Wilfrid Laurier University

Subhankar Nayak

Wilfrid Laurier University - Financial Services Research Centre

Marcos Fabricio Perez

Wilfrid Laurier University - School of Business & Economics

Date Written: April 3, 2013

Abstract

We study the dynamic impact of idiosyncratic volatility and bond liquidity on corporate bond spreads over time and empirically disentangle both effects. Using an extensive data set, we find that both idiosyncratic volatility and liquidity are critical mainly for the distress portfolios, i.e., low-rated and short-term bonds; for others only volatility matters. The effects of volatility and liquidity shocks on bond spreads were both exacerbated during the recent financial crisis. Liquidity shocks are quickly absorbed into bonds prices; however, volatility shocks are more persistent and have a long-term effect. Our results overall suggest significant differences between how volatility and liquidity dynamically impact bond spreads.

Keywords: bond liquidity, equity volatility, illiquid markets, corporate bond spreads, dynamic relationships

JEL Classification: G10, G14

Suggested Citation

Kalimipalli, Madhu and Nayak, Subhankar and Perez, Marcos Fabricio, Dynamic Effects of Idiosyncratic Volatility and Liquidity on Corporate Bond Spreads (April 3, 2013). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1900950 or http://dx.doi.org/10.2139/ssrn.1900950

Madhu Kalimipalli (Contact Author)

Lazaridis School of Business and Economics, Wilfrid Laurier University ( email )

Waterloo, Ontario N2L 3C5
Canada
519-884-0710 (Phone)

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

Subhankar Nayak

Wilfrid Laurier University - Financial Services Research Centre ( email )

Waterloo, Ontario N2L 3C5
Canada

Marcos Fabricio Perez

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
CANADA
519-884 0710 (Phone)
519-884 0201 (Fax)

HOME PAGE: http://www.public.asu.edu/~mfperez/

Register to save articles to
your library

Register

Paper statistics

Abstract Views
871
PlumX Metrics