Corporate Yield Spreads and Bond Liquidity

42 Pages Posted: 7 Feb 2004

See all articles by David A. Lesmond

David A. Lesmond

Tulane University - A.B. Freeman School of Business

Long Chen

Cheung Kong Graduate School of Business; Luohan Academy

Jason Zhanshun Wei

University of Toronto - Rotman School of Management

Date Written: April 2005

Abstract

We examine whether liquidity is priced in corporate yield spreads. Using a battery of liquidity measures covering over 4000 corporate bonds and spanning investment grade and speculative grade categories, we find that more illiquid bonds earn higher yield spreads; and that an improvement of liquidity causes a significant reduction in yield spreads. These results hold after controlling for common bond-specific, firm-specific, and macroeconomic variables, and are robust to issuers' fixed effect and potential endogeneity bias. Our finding mitigates the concern in the default risk literature that neither the level nor the dynamic of yield spreads can be fully explained by default risk determinants, and suggests that liquidity plays an important role in corporate bond valuation.

Suggested Citation

Lesmond, David A. and Chen, Long and Chen, Long and Wei, Jason Zhanshun, Corporate Yield Spreads and Bond Liquidity (April 2005). Available at SSRN: https://ssrn.com/abstract=495422 or http://dx.doi.org/10.2139/ssrn.495422

David A. Lesmond

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
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New Orleans, LA 70118
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504-865-5665 (Phone)
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Long Chen (Contact Author)

Luohan Academy ( email )

No. 556, Xixi Road, Z Space
Xihu District
Hangzhou, Zhejiang 310013
China
+86-0571-2688-8888-75520 (Phone)

Cheung Kong Graduate School of Business ( email )

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One East Chang An Avenue
Beijing, 100738
China

Jason Zhanshun Wei

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-978-3698 (Phone)
416-971-3048 (Fax)

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