Extreme illiquidity and cross-sectional corporate bond returns

Xi Chen, Junbo Wang, Chunchi Wu and Di Wu

Journal of Financial Markets, 2024, vol. 68, issue C

Abstract: Corporate bonds carry an extreme illiquidity (EIL) premium. This premium permeates all rating categories and heightens during financial crises and periods of high uncertainty. EIL has predictive power in the cross-section for future returns up to at least one year. Active investors like mutual funds prefer low EIL bonds that can be easily liquidated during times of stress, whereas passive institutional investors overweight high EIL bonds to receive the EIL premium. While adding an EIL factor constructed from portfolios to the factor model increases the explanatory power, its effect is largely subsumed by bond-level EIL in a horse race.

Keywords: Extreme illiquidity; Corporate bond pricing; Ratings; Financial crisis; Tail risk (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1386418124000132
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:68:y:2024:i:c:s1386418124000132

DOI: 10.1016/j.finmar.2024.100895

Access Statistics for this article

Journal of Financial Markets is currently edited by B. Lehmann, D. Seppi and A. Subrahmanyam

More articles in Journal of Financial Markets from Elsevier
Bibliographic data for series maintained by Catherine Liu ().