Explaining the On-The-Run Puzzle with Corporate Bonds

Anthony Jerome Anderson () and Michael Stuart Long
Additional contact information
Anthony Jerome Anderson: Department of Accounting, Howard University, School of Business, 2600 6th St., NW, Suite 348, Washington, DC 20059, USA
Michael Stuart Long: Rutgers Business School – Newark & New Brunswick, 1 Washington Park Place, Newark, NJ 07102, USA

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2017, vol. 20, issue 02, 1-36

Abstract: The on-the-run phenomenon is regularly found in the bond markets. It refers to the phenomenon of the yield difference observed when a new bond issue comes to market from the same issuer and gets a better price (lower yield given equivalent duration) from the market than the older issue. This paper proposes and tests a liquidity model to explain phenomenon introducing entropy as our liquidity measure. The yield differential results from the illiquidity cost of the older issue that has increased as a result of progressing through stages, which typically occur in an entropy process. We find that a model employing an entropy measure largely explains the on-the-run phenomenon, by accounting for over three-quarters of the liquidity differential for on-the-run corporate bonds.

Keywords: Bond liquidity; on-the-run (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219091517500084
Access to full text is restricted to subscribers

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:wsi:rpbfmp:v:20:y:2017:i:02:n:s0219091517500084

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219091517500084

Access Statistics for this article

Review of Pacific Basin Financial Markets and Policies (RPBFMP) is currently edited by Cheng-few Lee

More articles in Review of Pacific Basin Financial Markets and Policies (RPBFMP) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().