The Term Structure of Bond Liquidity

Monika Gehde-Trapp, Philipp Schuster and Marliese Uhrig-Homburg

Journal of Financial and Quantitative Analysis, 2018, vol. 53, issue 5, 2161-2197

Abstract: We analyze the impact of market frictions on the 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 hold only short-term assets) and predicts i) a hump-shaped relation between trading volume and maturity, ii) lower trading volumes of older compared with 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) spillovers of liquidity from short-term to long-term maturities. Empirical tests for U.S. corporate bonds support our theoretical predictions.

Date: 2018
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