Liquidity Risk Premia in Corporate Bond Markets

Frank de Jong () and Joost Driessen ()
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Frank de Jong: Finance Department, Tilburg University, P.O. Box 90153, 5000 LE, Tilburg, Netherlands
Joost Driessen: Finance Department, Tilburg University, P.O. Box 90153, 5000 LE, Tilburg, Netherlands

Quarterly Journal of Finance (QJF), 2012, vol. 02, issue 02, 1-34

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.

Keywords: Liquidity; corporate bonds; credit spread puzzle (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (35)

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DOI: 10.1142/S2010139212500061

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