Cyclical variations in liquidity risk of corporate bonds

Cassandre Anténor-Habazac (), Georges Dionne () and Sahar Guesmi ()
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Cassandre Anténor-Habazac: HEC Montreal, Canada Research Chair in Risk Management
Sahar Guesmi: HEC Montreal, Department of Decision science

No 18-3, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

Abstract: We study regime switching features of liquidity risk in corporate bond premiums. Within a sample period ranging from July 2002 to April 2015, we first compute a liquidity risk index for BBB bonds, which considers various liquidity risk facets based on principal component analysis. Second, we identify two liquidity regimes in our sample using a Markov switching regime model that highlights the dynamic characteristics of this risk and its behavior before, during and after the last financial crisis. We observe that the liquidity risk index improved after the financial crisis. It seems that the recent Volcker Rule did not affect the liquidity of BBB bonds during our sample period.

Keywords: Liquidity risk; corporate bonds; financial crisis; regime change; Markov model; principal component analysis (search for similar items in EconPapers)
JEL-codes: G01 G10 G18 G20 G21 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2018-05-10
New Economics Papers: this item is included in nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:ris:crcrmw:2018_003

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