The pricing of different dimensions of liquidity: Evidence from government guaranteed bonds

Jeffrey R. Black, Duane Stock and Pradeep K. Yadav

Journal of Banking & Finance, 2016, vol. 71, issue C, 119-132

Abstract: There are three important dimensions of liquidity: trading costs, depth, and resiliency. We investigate the relevance of each of these three dimensions of liquidity – separately and in conjunction – for the pricing of corporate bonds. Unlike previous studies, our sample allows us to cleanly separate the default and non-default components of yield spreads. We find that each of the above three dimensions of liquidity are priced factors. Overall, in our sample, a one standard deviation change in trading costs, resiliency, and depth measures lead to a change in non-default spreads of 5.00 basis points, 2.27 basis points, and 1.27 basis points, respectively. We also find that both bond-specific and market-wide dimensions of liquidity are priced in non-default spreads. Finally, we find that there does exist in some periods a small residual non-default yield spread that is consistent with an additional “flight-to-extreme-liquidity” premium reflecting investor preference for assets that enable quickest possible disengagement from the market when necessary.

Keywords: Bank bonds; Liquidity; Resiliency; Debt Guarantee Program (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:71:y:2016:i:c:p:119-132

DOI: 10.1016/j.jbankfin.2016.06.008

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