The Illiquidity of Corporate Bonds

This paper examines the illiquidity of corporate bonds and its asset-pricing implications. Using transactions data from 2003 to 2009, we show that the illiquidity in corporate bonds is substantial, significantly greater than what can be explained by bid-ask spreads. We establish a strong link betwee...

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Bibliographic Details
Published in:The Journal of finance (New York) 2011-06, Vol.66 (3), p.911-946
Main Authors: BAO, JACK, PAN, JUN, WANG, JIANG
Format: Article
Language:English
Subjects:
Asked price
Asset pricing
Bond market
Bonds
Certificates of deposit
Corporate bonds
Corporate finance
Corporate liquidity
Credit market
Credit risk
Financial research
Investment grade bonds
Investment returns
Junk bonds
Liquidity
Price changes
Spread
Statistical median
Studies
Trade
Yield
Yield curves
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Summary:This paper examines the illiquidity of corporate bonds and its asset-pricing implications. Using transactions data from 2003 to 2009, we show that the illiquidity in corporate bonds is substantial, significantly greater than what can be explained by bid-ask spreads. We establish a strong link between bond illiquidity and bond prices. In aggregate, changes in market-level illiquidity explain a substantial part of the time variation in yield spreads of high-rated (AAA through A) bonds, overshadowing the credit risk component. In the cross-section, the bond-level illiquidity measure explains individual bond yield spreads with large economic significance.
ISSN:0022-1082
1540-6261
DOI:10.1111/j.1540-6261.2011.01655.x