A Heterogeneous Agents Equilibrium Model for the Term Structure of Bond Market Liquidity

Gehde-Trapp, Monika; Schuster, Philipp; Uhrig-Homburg, Marliese

doi:10.2139/ssrn.2237879

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A Heterogeneous Agents Equilibrium Model for the Term Structure of Bond Market Liquidity

Forthcoming in the Journal of Financial and Quantitative Analysis (New title: The Term Structure of Bond Liquidity)

71 Pages Posted: 24 Mar 2013 Last revised: 9 Jun 2019

See all articles by Monika Gehde-Trapp

Marliese Uhrig-Homburg

Karlsruhe Institute of Technology (KIT) - Institute for Finance

Date Written: April 1, 2016

Abstract

We analyze the impact of market frictions on trading volume and liquidity premia of finite maturity assets when investors differ in their trading needs. Our equilibrium model generates a clientele effect (frequently trading investors only hold short-term assets) and predicts i) a hump-shaped relation between trading volume and maturity, ii) lower trading volumes of older compared to younger assets, iii) an increasing liquidity term structure from ask prices, iv) a decreasing or U-shaped liquidity term structure from bid prices, and v) spill-overs of liquidity from short-term to long-term maturities. Empirical tests for U.S. corporate bonds support our theoretical predictions.

Keywords: bond liquidity, term structure of liquidity premia, heterogeneous agents, aging effect, trading volume, equilibrium

JEL Classification: G11, G12

Suggested Citation: Suggested Citation

Gehde-Trapp, Monika and Schuster, Philipp and Uhrig-Homburg, Marliese, A Heterogeneous Agents Equilibrium Model for the Term Structure of Bond Market Liquidity (April 1, 2016). Forthcoming in the Journal of Financial and Quantitative Analysis (New title: The Term Structure of Bond Liquidity), Available at SSRN: https://ssrn.com/abstract=2237879 or http://dx.doi.org/10.2139/ssrn.2237879