Liquidity Pricing in Emerging Market Corporate Bonds

36 Pages Posted: 12 Dec 2019 Last revised: 6 Jan 2021

See all articles by Lennart Dekker

Lennart Dekker

Tilburg University - Department of Finance

Frank De Jong

Tilburg University - Department of Finance

Date Written: January 6, 2021

Abstract

This paper examines liquidity pricing in emerging market corporate bonds that are traded in the US market. Average market-wide effective bid-ask spreads are 0.51%, and rise to 1.12% during the financial crisis. Using time series regressions, we find that portfolios with illiquid bonds perform worst when market liquidity deteriorates. Fama-MacBeth regressions with forward looking expected returns as the dependent variable show evidence in favor of a negatively priced liquidity risk factor, which is in accordance with standard theory. Portfolio characteristics proxying for the liquidity level are also important determinants of the cross-sectional variation in expected returns of emerging market corporate bonds, and reduce the effect of the liquidity risk factor. The results for a matching sample of US bonds show a different pattern: with only market risk and liquidity risk factors, the price of liquidity risk is counter-intuitively positive. When controlling for liquidity level proxies, the liquidity risk premium vanishes for the US bonds.

Keywords: corporate bonds, emerging markets, liquidity

JEL Classification: G10, G12, G15

Suggested Citation

Dekker, Lennart and De Jong, Frank, Liquidity Pricing in Emerging Market Corporate Bonds (January 6, 2021). Available at SSRN: https://ssrn.com/abstract=3493243 or http://dx.doi.org/10.2139/ssrn.3493243

Lennart Dekker (Contact Author)

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Frank De Jong

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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