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The Illiquidity of Corporate Bonds
Author(s) -
BAO JACK,
PAN JUN,
WANG JIANG
Publication year - 2011
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.1540-6261.2011.01655.x
Subject(s) - bond , corporate bond , credit spread (options) , yield (engineering) , capital asset pricing model , bond market , economics , monetary economics , financial economics , asset (computer security) , credit risk , aggregate (composite) , bond valuation , business , actuarial science , finance , materials science , computer security , computer science , metallurgy , composite material
This paper examines the illiquidity of corporate bonds and its asset‐pricing implications. Using transactions data from 2003 to 2009, we show that the illiquidity in corporate bonds is substantial, significantly greater than what can be explained by bid–ask spreads. We establish a strong link between bond illiquidity and bond prices. In aggregate, changes in market‐level illiquidity explain a substantial part of the time variation in yield spreads of high‐rated (AAA through A) bonds, overshadowing the credit risk component. In the cross‐section, the bond‐level illiquidity measure explains individual bond yield spreads with large economic significance.