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Effects of Liquidity on the Nondefault Component of Corporate Yield Spreads: Evidence from Intraday Transactions Data

Song Han and Hao Zhou ()

No 22011, Working Papers from Hong Kong Institute for Monetary Research

Abstract: We estimate the nondefault component of corporate bond yield spreads and examine its relationship with bond liquidity. We measure bond liquidity using intraday transactions data and estimate the default component using the term structure of credit default swaps (CDS) spreads. With swap rate as the risk free rate, the estimated nondefault component is generally moderate but statistically significant for AA-, A-, and BBB-rated bonds and increasing in this order. With Treasury rate as the risk free rate, the estimated nondefault component is the largest in basis points for BBB-rated bonds but, as a fraction of yield spreads, it is the largest for AAA-rated bonds. Controlling for the unobservable firm heterogeneity, we find a positive and significant relationship between the nondefault component and illiquidity for investment-grade bonds but no significant relationship for speculative-grade bonds. We also find that the nondefault component comoves with indicators for macroeconomic conditions.

Keywords: Corporate Bond Yield Spreads; Credit Default Swaps; Liquidity; CDS-Bond Basis (search for similar items in EconPapers)
JEL-codes: G12 G13 G14 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2011-01
New Economics Papers: this item is included in nep-ban and nep-mst
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Related works:
Journal Article: Effects of Liquidity on the Non-Default Component of Corporate Yield Spreads: Evidence from Intraday Transactions Data (2016) Downloads
Working Paper: Effects of liquidity on the nondefault component of corporate yield spreads: evidence from intraday transactions data (2008) Downloads
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