An asset pricing approach to liquidity effects in corporate bond markets

Dion Bongaerts, Frank de Jong, Joost Driessen

Research output: Contribution to journalArticleScientificpeer-review

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.
LanguageEnglish
Pages1229-1269
JournalThe Review of Financial Studies
Volume30
Issue number4
DOIs
StatePublished - Apr 2017

Fingerprint

Corporate bonds
Asset pricing
Liquidity
Liquidity effect
Bond market
Liquidity risk
Bond returns
Liquidity shocks
Bond portfolio
Bayesian approach
Credit spreads
Risk premium
Equity markets
Market liquidity

Keywords

  • Liquidity premium
  • liquidity risk
  • corporate bonds
  • credit spread puzzle

Cite this

@article{5ed92df850a74e8cb9d4c07c41c0c6bc,
title = "An asset pricing approach to liquidity effects in corporate bond markets",
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.",
keywords = "Liquidity premium, liquidity risk, corporate bonds, credit spread puzzle",
author = "Dion Bongaerts and {de Jong}, Frank and Joost Driessen",
year = "2017",
month = "4",
doi = "10.1093/rfs/hhx005",
language = "English",
volume = "30",
pages = "1229--1269",
journal = "The Review of Financial Studies",
issn = "0893-9454",
publisher = "Oxford University Press",
number = "4",

}

An asset pricing approach to liquidity effects in corporate bond markets. / Bongaerts, Dion; de Jong, Frank; Driessen, Joost.

In: The Review of Financial Studies, Vol. 30, No. 4, 04.2017, p. 1229-1269.

Research output: Contribution to journalArticleScientificpeer-review

TY - JOUR

T1 - An asset pricing approach to liquidity effects in corporate bond markets

AU - Bongaerts,Dion

AU - de Jong,Frank

AU - Driessen,Joost

PY - 2017/4

Y1 - 2017/4

N2 - 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.

AB - 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.

KW - Liquidity premium

KW - liquidity risk

KW - corporate bonds

KW - credit spread puzzle

U2 - 10.1093/rfs/hhx005

DO - 10.1093/rfs/hhx005

M3 - Article

VL - 30

SP - 1229

EP - 1269

JO - The Review of Financial Studies

T2 - The Review of Financial Studies

JF - The Review of Financial Studies

SN - 0893-9454

IS - 4

ER -