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An asset pricing approach to liquidity effects in corporate bond markets

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We use an asset pricing approach to compare the effects of expected liquidity and liquidity risk on expected U.S. corporate bond returns. Liquidity measures are constructed for bond portfolios using a Bayesian approach to estimate Roll’s measure. The results show that expected bond liquidity and exposure to equity market liquidity risk affect expected bond returns, and that these liquidity effects explain a substantial part of the credit spread puzzle. In contrast, we find robust evidence that exposure to corporate bond liquidity shocks carries an economically negligible risk premium. We develop a simple theoretical model that can explain this finding.
Original languageEnglish
Pages (from-to)1229-1269
JournalThe Review of Financial Studies
Volume30
Issue number4
DOIs
StatePublished - Apr 2017

    Research areas

  • Liquidity premium, liquidity risk, corporate bonds, credit spread puzzle

DOI

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