Bond liquidity, debt maturity and bond risk premium

Yimin Zhou and Xu Wei

Finance Research Letters, 2023, vol. 54, issue C

Abstract: This paper investigates the effect of liquidity on bond risk premium in a model of endogenous debt maturity, in which a firm balances between rollover risk induced by short-term debt and liquidity risk of long-term bonds. Our model generates implications consistent with existing empirical findings. First, bond illiquidity can increase bond risk premium indirectly by increasing the amount of short-term debt and rollover risk, leading to comovement between liquidity risk premium and default risk premium. Second, bond illiquidity has a larger effect for lower-rating bonds. Our model also has new implications that can be tested by further empirical studies.

Keywords: Bond liquidity; Debt maturity; Risk premium; Rollover risk; Default risk (search for similar items in EconPapers)
JEL-codes: G12 G32 G33 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:54:y:2023:i:c:s1544612323000909

DOI: 10.1016/j.frl.2023.103716

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