Economic policy uncertainty and corporate bond liquidity

Jeffrey R. Black, Nirmol Das and Diego Leal

Journal of Banking & Finance, 2025, vol. 170, issue C

Abstract: We find that elevated economic policy uncertainty (EPU) is associated with reductions in corporate bond dealer inventories and worsening liquidity, suggesting bond dealers react to increased inventory risk by reducing their capital commitments and compensating themselves via increased transaction costs. A one standard deviation increase in EPU is associated with a 2.19% widening in bid-ask spreads, 2.36% increase in Amihud illiquidity, and 3.38% reduction in average inventories. This effect is greater for bonds issued by firms with direct exposure to government policy, and less pronounced in small firms, illiquid bonds, and calmer markets, suggesting that EPU affects bond liquidity more when macroeconomic, but not idiosyncratic, factors are the primary determinant of bond risk.

Keywords: Economic policy uncertainty; Bond liquidity; Corporate bonds; Inventory risk; Capital commitment (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 G18 (search for similar items in EconPapers)
Date: 2025
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378426624002541
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:jbfina:v:170:y:2025:i:c:s0378426624002541

DOI: 10.1016/j.jbankfin.2024.107340

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().