Liquidity risk and expected corporate bond returns

Hai Lin, Junbo Wang and Chunchi Wu

Journal of Financial Economics, 2011, vol. 99, issue 3, 628-650

Abstract: This paper studies the pricing of liquidity risk in the cross section of corporate bonds for the period from January 1994 to March 2009. The average return on bonds with high sensitivities to aggregate liquidity exceeds that for bonds with low sensitivities by about 4% annually. The positive relation between expected corporate bond returns and liquidity beta is robust to the effects of default and term betas, liquidity level, and other bond characteristics, as well as to different model specifications, test methodologies, and a variety of liquidity measures. The results suggest that liquidity risk is an important determinant of expected corporate bond returns.

Keywords: Liquidity; risk; Default; and; term; beta; Bond; pricing; Flight-to-quality (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (163)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:99:y:2011:i:3:p:628-650

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