An asset pricing approach to liquidity effects in corporate bond markets

Dion Bongaerts, JJAG Driessen, FCJM De Jong

Research output: Contribution to journalArticleAcademicpeer-review

47 Citations (Scopus)


We use an asset pricing approach to compare the effects of the liquidity level and liquidity risk on expected U.S. corporate bond returns. Using signed transaction data, we estimate effective transaction costs for bond portfolios by a repeat-sales method. We find that the liquidity level and exposure to equity market liquidity risk affect expected bond returns. In contrast, exposure to corporate bond liquidity shocks carries an economically negligible risk premium. A simulation study shows that it is unlikely that our results are driven by measurement error in betas or multicollinearity. We present a simple theoretical model that explains these findings.
Original languageEnglish
Pages (from-to)1229-1269
Number of pages41
JournalThe Review of Financial Studies
Issue number4
Publication statusPublished - 2018

Research programs

  • RSM F&A


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