Size-adapted bond liquidity measures and their asset pricing implications

Michael Reichenbacher and Philipp Schuster

Journal of Financial Economics, 2022, vol. 146, issue 2, 425-443

Abstract: We develop new liquidity measures for bond markets. Existing measures suffer from the combination of two effects. First, transaction costs in OTC markets strongly depend on trade size. Second, many bonds trade only scarcely with strongly differing trading volumes. Therefore, changes in average transaction costs often indicate changing trade sizes rather than changing liquidity. We combine full-sample information for the size-cost relation with individual transaction data to eliminate such measurement problems. We find that size-adapted measures make a difference when analyzing liquidity dynamics in the U.S. corporate bond market, liquidity differences between bonds, and the asset pricing implications of liquidity.

Keywords: Bond liquidity; Transaction costs; Bid-ask spread; Trade size; Asset pricing; Rating downgrades (search for similar items in EconPapers)
JEL-codes: C10 G11 G12 G14 G24 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:146:y:2022:i:2:p:425-443

DOI: 10.1016/j.jfineco.2022.07.010

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