Size-Adapted Bond Liquidity Measures and Their Asset Pricing Implications

Journal of Financial Economics 146 (2022) pp. 425-443

60 Pages Posted: 11 Apr 2019 Last revised: 15 Aug 2022

See all articles by Michael Reichenbacher

Michael Reichenbacher

Karlsruhe Institute of Technology (KIT), Institute for Finance

Philipp Schuster

University of Stuttgart

Date Written: July 13, 2022

Abstract

We develop new liquidity measures for bond markets. Existing measures suffer from the combination of two effects. First, transaction costs in OTC markets strongly depend on trade size. Second, many bonds trade only scarcely with strongly differing trading volumes. Therefore, changes in average transaction costs often indicate changing trade sizes rather than changing liquidity. We combine full-sample information for the size-cost relation with individual transaction data to eliminate such measurement problems. We find that size-adapted measures make a difference when analyzing liquidity dynamics in the U.S. corporate bond market, liquidity differences between bonds, and the asset pricing implications of liquidity.

Keywords: bond liquidity, transaction costs, bid-ask spread, trade size, asset pricing, rating downgrades

JEL Classification: C10, C14, G11, G12, G14

Suggested Citation

Reichenbacher, Michael and Schuster, Philipp, Size-Adapted Bond Liquidity Measures and Their Asset Pricing Implications (July 13, 2022). Journal of Financial Economics 146 (2022) pp. 425-443, Available at SSRN: https://ssrn.com/abstract=3366298 or http://dx.doi.org/10.2139/ssrn.3366298

Michael Reichenbacher (Contact Author)

Karlsruhe Institute of Technology (KIT), Institute for Finance ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

Philipp Schuster

University of Stuttgart ( email )

Keplerstraße 17
D-70174 Stuttgart
Germany
+49 711 685-86001 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
408
Abstract Views
1,721
rank
103,698
PlumX Metrics