Stock Liquidity and Corporate Bond Yield Spreads: Theory and Evidence

57 Pages Posted: 26 Dec 2014 Last revised: 18 Mar 2016

See all articles by Henry Hongren Huang

Henry Hongren Huang

National Central University

Hung-Yi Huang

National Central University - Department of Finance

Jeffrey Oxman

University of St. Thomas

Date Written: December 25, 2014

Abstract

We examine the impact of individual stock liquidity on corporate bond yield spreads in the U.S. market. By extending the endogenous-default model to include stock liquidity in the calculation of the bond value we show that a drop in stock liquidity will increase the firm’s credit risk by increasing the firm’s default boundary, leading to an increase of the credit spread. Our model is consistent with the sharp increase of credit risk premiums and the “yield spread spike” phenomenon in corporate bond markets during the financial crisis. We present empirical evidence supportive of our model.

JEL Classification: G12, G33

Suggested Citation

Huang, Henry Hongren and Huang, Hung-Yi and Oxman, Jeffrey, Stock Liquidity and Corporate Bond Yield Spreads: Theory and Evidence (December 25, 2014). Journal of Financial Research, Volume 38, Issue 1, Pages 1–143, Spring 2015, Available at SSRN: https://ssrn.com/abstract=2542703

Henry Hongren Huang (Contact Author)

National Central University ( email )

No. 300, Zhongda Road
Chung-Li Taiwan, 32054
Taiwan

Hung-Yi Huang

National Central University - Department of Finance ( email )

No. 300, Jhongda Rd, Jhogli City, Taoyuan, Taiwan,
Jhongli, TY 32001
Taiwan

Jeffrey Oxman

University of St. Thomas ( email )

1000 LaSalle Ave.
Minneapolis, MN 55403
United States

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