Liquidity Risk in the Corporate Bond Market

摘要

This paper examines the effect of liquidity and liquidity risk on corporate bond prices using the newly formed TRACE data set. In the spirit of Acharya and Pedersen's (2005) liquidity-adjusted capital asset pricing model, we examine the impact of multiple sources of risk on corporate bond prices using two different liquidity measures. The results lend support for the existence of liquidity risk in the corporate bond market. More illiquid portfolios have higher values for the three liquidity betas; betas that capture the commonality in liquidity with the market, the sensitivity in returns with the market-wide liquidity, and the liquidity sensitivity with the market returns. Furthermore, after running cross-sectional regressions we find evidence that liquidity risk is priced in the corporate bond market. We offer our estimated LCAPM liquidity risk betas that relate asset specific return/liquidity to market wide return/liquidity, as an explanation for the common factor found by other researchers in the portion of yield-spread changes that cannot be explained by commonly used determinants.