ILLIQUIDITY OR CREDIT DETERIORATION: A STUDY OF LIQUIDITY IN THE US CORPORATE BOND MARKET DURING FINANCIAL CRISES

Nils Friewald, Rainer Jankowitsch and Marti G. Subrahmanyam
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Nils Friewald: WU Vienna University of Economics and Business, Austria
Rainer Jankowitsch: WU Vienna University of Economics and Business, Austria
Marti G. Subrahmanyam: New York University, Stern School of Business, US

Chapter 6 in Managing and Measuring Risk:Emerging Global Standards and Regulations After the Financial Crisis, 2013, pp 159-200 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractWe investigate whether liquidity is an important price factor in the US corporate bond market. In particular, we focus on whether liquidity effects are more pronounced in periods of financial crises, especially for bonds with high credit risk, using a unique data set covering more than 20,000 bonds, between October 2004 and December 2008. We employ a wide range of liquidity measures and find that liquidity effects account for approximately 14% of the explained market-wide corporate yield spread changes. We conclude that the economic impact of the liquidity measures is significantly larger in periods of crisis, and for speculative grade bonds.

Keywords: Risk Management; Sovereign Risk; Systemic Risk; Liquidity; Credit Risk; Equity Risk Premium; Enterprise Risk Management (search for similar items in EconPapers)
Date: 2013
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