ILLIQUIDITY OR CREDIT DETERIORATION: A STUDY OF LIQUIDITY IN THE US CORPORATE BOND MARKET DURING FINANCIAL CRISES
We thank INQUIRE Europe for their support of this project and Markit for providing us with valuation data. We also thank Viral Acharya, Engelbert Dockner, Peter Feldhütter, Alois Geyer, Frank de Jong, Robert Korajczyk, David Lando, David Lesmond, Stefan Pichler, Jian Wang, Jason Wei, and especially the referee, Paul Schultz, and the editor, William Schwert, for helpful comments on prior drafts. We are grateful to conference participants at the the 2009 German Finance Association, the 2010 Midwest Finance Association, the 2010 Swiss Society for Financial Market Research, the Annual Finance Conference on Recent Advances in Corporate Finance of the Wilfrid Laurier University, the Fourth Annual Risk Management Conference of the National University of Singapore, the International Risk Management Conference of the University of Florence, the Third Erasmus Liquidity Conference of the Rotterdam School of Management, the 2010 China International Conference in Finance, the WU Gutmann Center Symposium 2011, and seminar participants at the Copenhagen Business School, University of Melbourne, ESSEC, NYU Stern School, the Italian Treasury, and Standard & Poor's for useful comments and suggestions.
This chapter was originally published under the same title in “Journal of Financial Economics”, 105, pp. 18–36, 2012.
We 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.
