Liquidity Premium in the Eye of the Beholder: An Analysis of the Clientele Effect in the Corporate Bond Market

Xuanjuan Chen (), Jingzhi Huang, Zhenzhen Sun (), Tong Yao () and Tong Yu ()
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Xuanjuan Chen: School of Finance, Shanghai University of Finance and Economics, Shanghai 200433, China
Zhenzhen Sun: Charlton College of Business, University of Massachusetts Dartmouth, Dartmouth, Massachusetts 02747
Tong Yao: Henry B. Tippie College of Business, University of Iowa, Iowa City, Iowa 52240
Tong Yu: Carl H. Lindner School of Business, University of Cincinnati, Cincinnatti, Ohio 45220

Management Science, 2020, vol. 66, issue 2, 932-957

Abstract: This paper examines how liquidity and investors’ heterogeneous liquidity preferences interact to affect asset pricing. Using data on insurers’ corporate bond holdings, we find that illiquidity of corporate bond portfolios varies widely and persistently across insurers and is related to insurers’ investment horizon and funding constraint, consistent with the notion of liquidity clientele. We further find that liquidity clientele affects corporate bond prices—specifically, liquidity premia are lower among corporate bonds heavily held by investors with weaker preference for liquidity.

Keywords: corporate bond holdings; liquidity clientele; liquidity and spreads (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (17)

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