Asymmetry in Liquidity Pricing in the Cross-Section and Time Series of Corporate Bond Returns

52 Pages Posted: 22 May 2020 Last revised: 31 Dec 2020

See all articles by Fabian Dienemann

Fabian Dienemann

UNSW Australia Business School, School of Banking and Finance

Date Written: December 31, 2020

Abstract

Asymmetry in price pressure from seller versus buyer-initiated transactions is a valuable measure of downside liquidity for corporate bonds. Larger relative price impact of sellers can exacerbate market downturns in flight-to-liquidity environments. While the evidence of an illiquidity characteristics premium in the cross-section of corporate bonds is mixed, aggregate liquidity asymmetry has high explanatory power for the time series of market returns. Its statistical and economic significance justify it as credible asset pricing factor. Average market-wide liquidity asymmetry comoves with interest rate and credit spread changes, investor sentiment, funding liquidity, dealer inventory, ETF flows and post-crisis regulatory change.

Keywords: Liquidity; Liquidity risk; Downside risk; Asset pricing; Corporate bonds

JEL Classification: D82; G11; G12; G14

Suggested Citation

Dienemann, Fabian, Asymmetry in Liquidity Pricing in the Cross-Section and Time Series of Corporate Bond Returns (December 31, 2020). Available at SSRN: https://ssrn.com/abstract=3585526 or http://dx.doi.org/10.2139/ssrn.3585526

Fabian Dienemann (Contact Author)

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

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

Paper statistics

Downloads
57
Abstract Views
325
rank
447,229
PlumX Metrics