Pricing Illiquidity of Corporate Bonds Through Static and Dynamic Measures

Abstract

This paper studies the price impact of corporate bond illiquidity. Through dynamic panel estimation, price dispersion and resiliency, which have been used separately in extant studies, are simultaneously considered to price illiquidity. We find that the dynamic model, which has both measures, fits better than the static model that incorporates only price dispersion. We also confirm that the impact of the two measures systematically react to credit ratings of bonds. These results imply the importance of considering multiple measures to price illiquidity.

Keywords: bond spreads, illiquidity, price dispersion, persistency

JEL Classification: C23, C58, E44, G12