How Much Can Illiquidity Affect Corporate Debt Yield Spread?

43 Pages Posted: 19 Jun 2015 Last revised: 20 Jun 2016

See all articles by Menachem (Meni) Abudy

Menachem (Meni) Abudy

Bar-Ilan University - Graduate School of Business Administration

Alon Raviv

Bar-Ilan University - Graduate School of Business Administration

Date Written: April 21, 2016

Abstract

We present a structural method for measuring the upper bound for the illiquidity risk of liabilities issued by a levered firm. The method calculates the upper bound of illiquidity spread of a corporate bond given its duration and the issuing firm’s asset risk and leverage ratio. Consistent with the empirical literature the illiquidity spread is positively related to the issuing firm’s asset risk and leverage ratio and the illiquidity component increases with a bond’s credit quality. The term structure of illiquidity spread has a humped shape, where its maximum level depends on the firm's leverage ratio. Finally, we demonstrate how the method’s implied restricted trading period can be used as a measure for illiquidity in the bonds’ market.

Keywords: corporate bonds, illiquidity, illiquidity spread, yield spread, financial crises

JEL Classification: G01, G12, G13

Suggested Citation

Abudy, Menachem (Meni) and Raviv, Alon, How Much Can Illiquidity Affect Corporate Debt Yield Spread? (April 21, 2016). Available at SSRN: https://ssrn.com/abstract=2619618 or http://dx.doi.org/10.2139/ssrn.2619618

Menachem (Meni) Abudy (Contact Author)

Bar-Ilan University - Graduate School of Business Administration ( email )

Ramat Gan
Israel

Alon Raviv

Bar-Ilan University - Graduate School of Business Administration ( email )

The Graduate School of Business Administration
Ana and Max Web st
Ramat Gan
Israel

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
336
Abstract Views
2,489
rank
101,261
PlumX Metrics