The term structure of illiquidity premia

Alexander Kempf, Olaf Korn and Marliese Uhrig-Homburg

No 09-14, CFR Working Papers from University of Cologne, Centre for Financial Research (CFR)

Abstract: This paper investigates the dynamics of the term structure of bond market illiquidity premia using data on German bond market segments which differ only with respect to their liquidity. We analyze the interaction between different parts of the term structure and identify economic factors that drive the illiquidity premia. We obtain three main results: (i) The term structure of illiquidity premia is U-shaped on average but its shape varies over time. (ii) There is a strict separation between the short end and the long end of the term structure of illiquidity premia, i.e. we find no evidence for spill-over effects across different maturities. Different economic factors drive different parts of the term structure. The short end is mainly driven by asset market volatilities which suggests a fight-to-liquidity effect. In contrast, the long end depends on long-term business cycle economic prospects. This suggests that different parts of the term structure are determined by different investor clienteles with different liquidity needs. (iii) There is a smooth transition from short-term to long-term illiquidity premia. The longer the time to maturity of a bond, the less important market volatilities are and the more important long-term economic prospects become.

Keywords: bond liquidity; term structure of illiquidity premia (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfrwps:0914

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