Expected Bond Liquidity

45 Pages Posted: 14 Jul 2020 Last revised: 31 Jul 2020

See all articles by Michael Reichenbacher

Michael Reichenbacher

Karlsruhe Institute of Technology (KIT), Institute for Finance

Philipp Schuster

University of Stuttgart, Institute of Business Administration

Marliese Uhrig‐Homburg

Karlsruhe Institute of Technology

Date Written: July 30, 2020

Abstract

We introduce an approach to forecast individual bond liquidity and apply it to the U.S. corporate bond market. Our model combines three dynamic prediction models to get the most accurate estimate for future bond liquidity. We compare the new prediction methodology with the literature’s current approach to use a bond’s liquidity of today as the best estimate for its liquidity tomorrow. Our approach generates significantly lower forecasting errors and is much better able to capture the premium for expected liquidity in bond yields. We provide evidence that investors in corporate bond funds actively anticipate liquidity deterioration in underperforming funds and sell their shares in advance to secure a first-mover advantage.

Keywords: bond liquidity, bid-ask spread, forecasting, asset pricing, bond funds

JEL Classification: C10, C53, G12, G17, G20

Suggested Citation

Reichenbacher, Michael and Schuster, Philipp and Uhrig‐Homburg, Marliese, Expected Bond Liquidity (July 30, 2020). Available at SSRN: https://ssrn.com/abstract=3642604 or http://dx.doi.org/10.2139/ssrn.3642604

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, Institute of Business Administration ( email )

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

Marliese Uhrig‐Homburg

Karlsruhe Institute of Technology

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

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