Does Trading Frequency Affect Subordinated Debt Spreads?

35 Pages Posted: 1 Feb 2005

See all articles by Christopher Bianchi

Christopher Bianchi

Federal Reserve Board - Division of Research and Statistics

Diana Hancock

Board of Governors of the Federal Reserve System

Laura Kawano

University of Michigan at Ann Arbor

Date Written: January 2005

Abstract

Because illiquid bonds may be relatively poorly priced, the ability to infer investor perceptions of changes in a banking organization's financial health from such bonds may be obscured. To examine the time-series effect of trading frequency on subordinated debt spreads, we consider the liquidity of subordinated debt for large, complex U.S. banking organizations over the 1987:Q2 - 2002:Q4 period. Since trade volumes are unobservable, we construct various measures of weekly trading frequency from observed bond prices. Using these indirect liquidity measures, we find evidence that trading frequency does significantly affect observed subordinated debt spreads. We also provide estimates for the premium of illiquidity.

Keywords: Bond liquidity, pricing

JEL Classification: G18, G21

Suggested Citation

Bianchi, Christopher and Hancock, Diana and Kawano, Laura, Does Trading Frequency Affect Subordinated Debt Spreads? (January 2005). Available at SSRN: https://ssrn.com/abstract=658282 or http://dx.doi.org/10.2139/ssrn.658282

Christopher Bianchi

Federal Reserve Board - Division of Research and Statistics

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Diana Hancock (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Washington, DC 20551
United States
202-452-3019 (Phone)
202-452-5295 (Fax)

Laura Kawano

University of Michigan at Ann Arbor ( email )

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