The Illiquidity of Corporate Bonds

By Jack Bao, Jun Pan, Jiang Wang. 2011

910 citations recorded by the source corpus.

This paper examines the illiquidity of corporate bonds and its asset-pricing implications. Using transactions data from 2003 to 2009, we show that the illiquidity in corporate bonds is substantial, significantly greater than what can be explained by bid–ask spreads. We establish a strong link between bond illiquidity and bond prices. In aggregate, changes in market-level illiquidity explain a substantial part of the time variation in yield spreads of high-rated (AAA through A) bonds, overshadowing the credit risk component. In the cross-section, the bond-level illiquidity measure explains individual bond yield spreads with large economic significance.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/c5de1d619a4fbeb58fc2686e66f092fdf5f25514

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Citations in the corpus

Noise as Information for Illiquidity: Noise as Information for Illiquidity (2013, neutral): “This work includes, for example, Pastor and Stambaugh (2003) and Acharya and Pedersen (2005) on equities and Bao, Pan, and Wang (2011) on corporate bonds.7 These studies follow a common approach, which is to focus on a specific market to both construct and test the liquidity risk measure.”
Understanding FX Liquidity (2015, methodology): “The BPW estimate is a simple and robust measure of illiquidity for corporate bonds, as argued by Bao et al. The higher is the BPW, the lower is liquidity. We compute the BPW measure for each month in our sample from the daily mid FX prices data. Our third low-frequency liquidity measure is the relat”
Climate Change News Risk and Corporate Bond Returns (2020, neutral): “Mergent FISD ILLIQUIDITY Bond illiquidity is computed at the end of eachmonth t for eachbond i as covt Δpi,t ,τ ,Δpi ,t ,τþ1 , where Δpi ,t ,τ is the change in the natural logarithm of the price on day τ of month t (Bao et al. (2011)).”
The Volcker Rule and Market-Making in Times of Stress (2016, neutral): “…and first major contribution of our paper is to study whether illiquidity is relatively worse in periods of stress after the Volcker Rule was 2 See Bao, Pan, and Wang (2011), Dick-Nielsen, Feldhutter, and Lando (2012), and Friewald,…”
The Determinants of Recovery Rates in the US Corporate Bond Market (2014, background): “4Black and Cox (1976), Leland (1994), Longstaff and Schwartz (1995), Leland and Toft (1996), Anderson and Sundaresan (1996), Mella-Barral and Perraudin (1997), Collin-Dufresne et al.”
Investor Flows and Fragility in Corporate Bond Funds (2017, background): “First, Bao, Pan, and Wang (2011) find that increase in the aggregate stock market volatility, as proxied by the VIX index, strongly and positively impacts the illiquidity of corporate bonds.”
Illiquidity or Credit Deterioration: A Study of Liquidity in the US Corporate Bond Market during Financial Crises (2012, methodology): “These include Bao, Pan, and Wang (2011) and Dick-Nielsen, Feldhütter, and Lando (2011).”