Aggregate Stock Market Illiquidity and Bond Risk Premia

Kees E. Bouwman, Elvira Sojli and Wing Wah Tham
Additional contact information
Kees E. Bouwman: Erasmus University Rotterdam
Wing Wah Tham: Erasmus University Rotterdam

Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: Winner 2014 Crowell Second Prize. We assess the effect of aggregate stock market illiquidity on U.S. Treasury bond risk premia. We find that the stock market illiquidity variable adds to the well established Cochrane-Piazzesi and Ludvigson-Ng factors. It explains 10%, 9%, 7%, and 7% of the one-year-ahead variation in the excess return for two-, three-, four-, and five-year bonds respectively and increases the adjusted R 2 by 3-6% across all maturities over Cochrane and Piazzesi (2005) and Ludvigson and Ng (2009) factors. The effects are highly statistically and economically significant both in and out of sample. We find that our result is robust to and is not driven by information from open interest in the futures market, long-run inflation expectations, dispersion in beliefs, and funding liquidity. We argue that stock market illiquidity is a timely variable that is related to "right-to-quality" episodes and might contain information about expected future business conditions through funding liquidity and investment channels.

Keywords: Market liquidity; Bond risk premia; Flight-to-quality (search for similar items in EconPapers)
JEL-codes: G10 G14 G20 (search for similar items in EconPapers)
Date: 2012-12-12
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://papers.tinbergen.nl/12140.pdf (application/pdf)

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:tin:wpaper:20120140

Access Statistics for this paper

More papers in Tinbergen Institute Discussion Papers from Tinbergen Institute Contact information at EDIRC.
Bibliographic data for series maintained by Tinbergen Office +31 (0)10-4088900 ().