Size-Adapted Bond Liquidity Measures and Their Asset Pricing Implications
2020 AFA, 2019 FMA, 2018 SAFE Asset Pricing Workshop
57 Pages Posted: 11 Apr 2019 Last revised: 18 Dec 2020
Date Written: December 18, 2020
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. Exploiting their higher measurement precision, our size-adapted measures uncover the joint pricing of liquidity level and liquidity risk in the cross-section of U.S.
Keywords: bond liquidity, transaction costs, bid-ask spread, trade size, asset pricing, rating downgrades
JEL Classification: C10, C14, G11, G12, G14
Suggested Citation: Suggested Citation