Liquidity risk premia in corporate bond markets

Research output: Contribution to journalArticleScientificpeer-review

Abstract

This paper explores the role of liquidity risk in the pricing of corporate bonds. We show that corporate bond returns have significant exposures to fluctuations in treasury bond liquidity and equity market liquidity. Further, this liquidity risk is a priced factor for the expected returns on corporate bonds, and the associated liquidity risk premia help to explain the credit spread puzzle. In terms of expected returns, the total estimated liquidity risk premium is around 0.6% per annum for US long-maturity investment grade bonds. For speculative grade bonds, which have higher exposures to the liquidity factors, the liquidity risk premium is around 1.5% per annum. We find very similar evidence for the liquidity risk exposure of corporate bonds for a sample of European corporate bond prices.
Original languageEnglish
JournalQuarterly Journal of Finance
Volume02
Issue number02
Publication statusPublished - 2012

Fingerprint

Corporate bonds
Liquidity risk
Bond market
Risk premia
Liquidity
Risk premium
Factors
Expected returns
Maturity
Credit spreads
Bond returns
Treasury bonds
Equity markets
Fluctuations
Bond prices
Risk exposure
Pricing
Market liquidity

Cite this

@article{ad0936ea8e744ef3b79e5e09357e906c,
title = "Liquidity risk premia in corporate bond markets",
abstract = "This paper explores the role of liquidity risk in the pricing of corporate bonds. We show that corporate bond returns have significant exposures to fluctuations in treasury bond liquidity and equity market liquidity. Further, this liquidity risk is a priced factor for the expected returns on corporate bonds, and the associated liquidity risk premia help to explain the credit spread puzzle. In terms of expected returns, the total estimated liquidity risk premium is around 0.6{\%} per annum for US long-maturity investment grade bonds. For speculative grade bonds, which have higher exposures to the liquidity factors, the liquidity risk premium is around 1.5{\%} per annum. We find very similar evidence for the liquidity risk exposure of corporate bonds for a sample of European corporate bond prices.",
author = "J.J.A.G. Driessen and {de Jong}, F.C.J.M.",
year = "2012",
language = "English",
volume = "02",
journal = "Quarterly Journal of Finance",
issn = "2010-1392",
publisher = "World Scientific Publishing Co. Pte Ltd",
number = "02",

}

Liquidity risk premia in corporate bond markets. / Driessen, J.J.A.G.; de Jong, F.C.J.M.

In: Quarterly Journal of Finance, Vol. 02, No. 02, 2012.

Research output: Contribution to journalArticleScientificpeer-review

TY - JOUR

T1 - Liquidity risk premia in corporate bond markets

AU - Driessen, J.J.A.G.

AU - de Jong, F.C.J.M.

PY - 2012

Y1 - 2012

N2 - This paper explores the role of liquidity risk in the pricing of corporate bonds. We show that corporate bond returns have significant exposures to fluctuations in treasury bond liquidity and equity market liquidity. Further, this liquidity risk is a priced factor for the expected returns on corporate bonds, and the associated liquidity risk premia help to explain the credit spread puzzle. In terms of expected returns, the total estimated liquidity risk premium is around 0.6% per annum for US long-maturity investment grade bonds. For speculative grade bonds, which have higher exposures to the liquidity factors, the liquidity risk premium is around 1.5% per annum. We find very similar evidence for the liquidity risk exposure of corporate bonds for a sample of European corporate bond prices.

AB - This paper explores the role of liquidity risk in the pricing of corporate bonds. We show that corporate bond returns have significant exposures to fluctuations in treasury bond liquidity and equity market liquidity. Further, this liquidity risk is a priced factor for the expected returns on corporate bonds, and the associated liquidity risk premia help to explain the credit spread puzzle. In terms of expected returns, the total estimated liquidity risk premium is around 0.6% per annum for US long-maturity investment grade bonds. For speculative grade bonds, which have higher exposures to the liquidity factors, the liquidity risk premium is around 1.5% per annum. We find very similar evidence for the liquidity risk exposure of corporate bonds for a sample of European corporate bond prices.

M3 - Article

VL - 02

JO - Quarterly Journal of Finance

JF - Quarterly Journal of Finance

SN - 2010-1392

IS - 02

ER -