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
Date Written: July 13, 2022
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: Suggested Citation