The Illiquidity of Corporate Bonds

The Illiquidity of Corporate Bonds

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Article ID: iaor201112061
Volume: 66
Issue: 3
Start Page Number: 911
End Page Number: 946
Publication Date: Jun 2011
Journal: The Journal of Finance
Authors: , ,
Keywords: credit risk
Abstract:

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.

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