An asset pricing approach to liquidity effects in corporate bond markets
Bongaerts,Dion de Jong,Frank Driessen,Joost
Bongaerts,Dion
de Jong,Frank
Driessen,Joost
Abstract
We use an asset pricing approach to compare the effects of expected liquidity and liquidity risk on expected U.S. corporate bond returns. Liquidity measures are constructed for bond portfolios using a Bayesian approach to estimate Roll’s measure. The results show that expected bond liquidity and exposure to equity market liquidity risk affect expected bond returns, and that these liquidity effects explain a substantial part of the credit spread puzzle. In contrast, we find robust evidence that exposure to corporate bond liquidity shocks carries an economically negligible risk premium. We develop a simple theoretical model that can explain this finding.
Description
Date
2017-04
Journal Title
Journal ISSN
Volume Title
Publisher
Research Projects
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Journal Issue
Keywords
Liquidity premium, liquidity risk, corporate bonds, credit spread puzzle, C51 - Model Construction and Estimation, G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates, G13 - Contingent Pricing ; Futures Pricing
Citation
Bongaerts, D, de Jong, F & Driessen, J 2017, 'An asset pricing approach to liquidity effects in corporate bond markets', Review of Financial Studies, vol. 30, no. 4, pp. 1229-1269. https://doi.org/10.1093/rfs/hhx005