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Liquidity or Credit Risk? The Determinants of Very Short‐Term Corporate Yield Spreads
Author(s) -
COVITZ DAN,
DOWNING CHRIS
Publication year - 2007
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2007.01276.x
Subject(s) - market liquidity , yield (engineering) , liquidity risk , business , credit risk , corporate bond , bond , term (time) , liquidity crisis , monetary economics , financial system , economics , financial economics , finance , materials science , physics , quantum mechanics , metallurgy
Employing a comprehensive database on transactions of commercial paper issued by domestic U.S. nonfinancial corporations, we study the determinants of very short‐term corporate yield spreads. We find that liquidity plays a role in the determination of spreads but, somewhat surprisingly, credit quality is the more important determinant of spreads, even at horizons of less than 1 month. These results are robust across a variety of proxies for liquidity and credit risk, and have important implications for the literature on the modeling of corporate bond prices.