Liquidity and Liquidity Risk in the Corporate Bond Market
Speaker
Abstract
| This paper explores the role of expected liquidity and liquidity risk in the pricing of corporate bonds. In particular, we investigate to which extend liquidity can help to explain the credit spread puzzle. For our analysis, we use the TRACE data on an intra-day frequency. Since these data do not contain bid-ask-spreads, we estimate them latently using a Gibbs sampler in a similar spirit as in Hasbrouck (forthcoming). We find a significant premium on expected liquidity, but little evidence for liquidity risk. The liquidity premium goes a long way in explaining the credit spread puzzle. |
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| Sebastian Gryglewicz |
