Stories of Liquidity and Credit

Andria Merwe

Chapter 5 in Market Liquidity Risk, 2015, pp 115-142 from Palgrave Macmillan

Abstract: Abstract In 1959, Professor Lawrence Fisher1 presented a hypothesis about the determinants of the risk premium on corporate bonds.2 Fisher showed that the average risk premium, defined as the yield differential between a corporate bond and the risk-free rate, depends on two factors. The first factor reflects the default risk or creditworthiness of the issuer. It captures the basic idea that the lender will get their money back. Incidentally, this factor has dominated our thinking about bonds in general and corporate bonds in particular. But Fisher also considered the “marketability” or liquidity of the bond, defined as the market value of the firms outstanding bonds traded in the secondary market, to contribute to the risk premium.3 If Fisher introduced the idea of “marketability” in the middle of the last century, why have we for the most part ignored bond market liquidity?

Keywords: Credit Risk; Credit Default Swap; Default Risk; Bond Market; Corporate Bond (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-1-137-38923-7_5

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DOI: 10.1057/9781137389237_5

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