Liquidity Premium in the Eye of the Beholder: An Analysis of the Clientele Effect in the Corporate Bond Market

59 Pages Posted: 24 May 2013 Last revised: 11 Sep 2014

Jing-Zhi Huang

Pennsylvania State University - University Park - Department of Finance

Zhenzhen Sun

Siena College - School of Business

Tong Yao

University of Iowa - Henry B. Tippie College of Business

Tong Yu

University of Cincinnati

Date Written: September 2014

Abstract

This paper examines how liquidity and investors' heterogeneous liquidity preferences interact to affect asset pricing. We construct measures of liquidity preferences using data on insurer corporate bond holdings, and find that investors' preferences are highly persistent over time and related to investment horizons and funding constraints. We provide evidence that investors vary widely in their preferences and, more importantly, evidence for liquidity clientele. Further, we find evidence that liquidity clienteles affect corporate bond prices --- specifically, both the level and volatility of liquidity premia are substantially attenuated among corporate bonds heavily held by investors with a weak preference for liquidity.

Keywords: Corporate Bond Holdings, Liquidity Clientele, Corporate Bond Liquidity and Spreads

JEL Classification: G01, G12, G22, C23

Suggested Citation

Huang, Jing-Zhi and Sun, Zhenzhen and Yao, Tong and Yu, Tong, Liquidity Premium in the Eye of the Beholder: An Analysis of the Clientele Effect in the Corporate Bond Market (September 2014). Asian Finance Association (AsFA) 2013 Conference. Available at SSRN: https://ssrn.com/abstract=2269894 or http://dx.doi.org/10.2139/ssrn.2269894

Jing-Zhi Jay Huang (Contact Author)

Pennsylvania State University - University Park - Department of Finance ( email )

University Park, PA 16802
United States

HOME PAGE: http://www.personal.psu.edu/jxh56

Zhenzhen Sun

Siena College - School of Business ( email )

515 Loudon Road
Loudonville, NY 12110
United States
518-782-6830 (Phone)

Tong Yao

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States

Tong Yu

University of Cincinnati ( email )

P.O. Box 210195
Cincinnati, OH 45221-0195
United States
4019548606 (Phone)
4019548606 (Fax)

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