An asset pricing approach to liquidity effects in corporate bond markets

Dion Bongaerts, Frank de Jong, Joost Driessen

Research output: Contribution to journalArticleScientificpeer-review

17 Citations (Scopus)

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.
Original languageEnglish
Pages (from-to)1229-1269
JournalThe Review of Financial Studies
Volume30
Issue number4
DOIs
Publication statusPublished - Apr 2017

Keywords

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

Fingerprint Dive into the research topics of 'An asset pricing approach to liquidity effects in corporate bond markets'. Together they form a unique fingerprint.

  • Cite this