Is Liquidity Reflected in Bond Yields? Evidence from the Euro Corporate Bond Market

Patrick Houweling, Albert Mentink and Ton Vorst ()
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Albert Mentink: Erasmus University Rotterdam and AEGON Asset Management

Finance from EconWPA

Abstract: We test whether liquidity is priced in the euro-denominated corporate bond market. We use the Arbitrage Pricing Theory to control for other sources of risk. Yields are used to measure the bonds' expected returns and liquidity is approximated by four indirect measures: issued amount, age, number of quotes and dispersion of quotes. Our results show that significant pricing anomalies due to liquidity exist for euro- denominated bonds. We find that the yield premium between liquid and illiquid bonds ranges from 0.2 to 47 basis points, depending on which liquidity indicator is used.

Keywords: corporate bonds; liquidity; spreads; yields; euro (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-fin and nep-fmk
Date: 2002-06-10
Note: Type of Document - PDF; prepared on PC; pages: 30
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0206001

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