A heterogeneous agents equilibrium model for the term structure of bond market liquidity

Philipp Schuster, Monika Trapp and Marliese Uhrig-Homburg

CFR Working Papers from University of Cologne, Centre for Financial Research (CFR)

Abstract: We analyze the impact of market frictions on trading volume and liquidity premia of finite maturity assets when investors differ in their trading needs. Our equilibrium model generates a clientele effect (frequently trading investors only hold short-term assets) and predicts i) a hump-shaped relation between trading volume and maturity, ii) lower trading volumes of older compared to younger assets, iii) an increasing liquidity term structure from ask prices, iv) a decreasing or U-shaped liquidity term structure from bid prices, and v) spill-overs of liquidity from short-term to long-term maturities. Empirical tests for U.S. corporate bonds support our theoretical predictions.

Keywords: bond liquidity; term structure of liquidity premia; heterogeneous agents; aging effect; trading volume; equilibrium (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfrwps:1305r2

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