Corporate Bond Illiquidity: Evidence from Government Guarantees

39 Pages Posted: 6 Aug 2020

See all articles by Kurt F. Lewis

Kurt F. Lewis

Board of Governors of the Federal Reserve System

Lubomir Petrasek

Board of Governors of the Federal Reserve System

Date Written: July 1, 2020

Abstract

We use a matched sample of corporate bonds that are guaranteed by the full faith and credit of the U.S. government and non-guaranteed corporate bonds of the same issuers to examine default and non-default related components in bond spreads. We find that less than one-fifth of the yield spread between short-term, investment grade corporate bonds and Treasury securities is compensation for illiquidity. Our estimates of the liquidity component in corporate bond spreads differ significantly from the bond-CDS basis. We also find evidence that the corporate bond bid-ask spread is largely related to credit risk.

Keywords: Liquidity, Credit Risk, Corporate Bonds, Government Guarantees

JEL Classification: G12, G18

Suggested Citation

Lewis, Kurt F. and Petrasek, Lubomir, Corporate Bond Illiquidity: Evidence from Government Guarantees (July 1, 2020). Available at SSRN: https://ssrn.com/abstract=3647492 or http://dx.doi.org/10.2139/ssrn.3647492

Kurt F. Lewis

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://kurtflewis.com

Lubomir Petrasek (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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