Illiquidity and Corporate Bond Spreads after the Fed Tightening

25 Pages Posted: 11 May 2018 Last revised: 24 Jun 2020

See all articles by Lucas B. Dyskant

Lucas B. Dyskant

TP ICAP Americas

Andre C. Silva

Nova School of Business and Economics

Date Written: June 24, 2020

Abstract

We find that the Fed tightening period has the strongest effect on the illiquidity spreads for corporate bonds compared with other recent periods of crisis. We use transactions data to calculate illiquidity measures of corporate bond issues from 2007 to 2017. There are peaks of illiquidity during the financial crisis in 2008, around the regulatory changes and the European debt crisis in 2010, and after the Fed tightening in 2015. The impact for the Fed tightening period is higher even comparing with the period of the financial crisis. A one standard deviation increase of the illiquidity measure increases yield spreads by 12% during the 2008 crisis and 11% in the post-crisis period after 2010. The same increase in the bond illiquidity measure increases yield spreads by 18% during the monetary tightening period. We discuss reasons for the impact of the Fed tightening and further analyze factors that correlate with individual and aggregate measures of illiquidity.

Keywords: illiquidity, asset pricing, corporate bond spreads, corporate bond market.

JEL Classification: G01, G12, G14

Suggested Citation

Dyskant, Lucas B. and Silva, Andre C., Illiquidity and Corporate Bond Spreads after the Fed Tightening (June 24, 2020). Available at SSRN: https://ssrn.com/abstract=3171087 or http://dx.doi.org/10.2139/ssrn.3171087

Lucas B. Dyskant

TP ICAP Americas ( email )

101 Hudson Street
Jersey City, NJ 07302
United States

Andre C. Silva (Contact Author)

Nova School of Business and Economics ( email )

Campus de Carcavelos
Carcavelos, 2775-405
Portugal

HOME PAGE: http://sites.google.com/view/andredecastrosilva

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