An asset pricing approach to liquidity effects in corporate bond markets

Dion Bongaerts, JJAG Driessen, FCJM De Jong

Research output: Contribution to journalArticleAcademicpeer-review

33 Citations (Scopus)

Abstract

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
Volume30
Issue number4
DOIs
Publication statusPublished - 2018

Fingerprint

Dive into the research topics of 'An asset pricing approach to liquidity effects in corporate bond markets'. Together they form a unique fingerprint.

Cite this