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Apr 1, 2023 · The literature provides evidence of a mixed impact of liquidity and credit risk on bond yield spreads. Although credit risk and liquidity are the major components of corporate yield spreads, a significant residual portion remains unexplained by these two factors.
We investigate bond-specific liquidity effects on the yield spread using three separate liquidity measures, namely, these include the bid–ask spread, the liquidity proxy of zero returns, and a liquidity estimator based on a model variant of Lesmond, Ogden, and Trzcinka (1999).
- Long Chen, David A. Lesmond, Jason Wei
- 2007
In this reduced-form model, corporate bond cash flows are discounted at an adjusted rate that includes a liquidity or convenience yield process. This feature allows the model to capture any liquidity or other nondefault-related components in corporate bond prices.
- Francis A. Longstaff, Sanjay Mithal, Eric Neis
- 2005
Nov 20, 2024 · Research indicates that strong links between systematic liquidity risk to the pricing of securities in the corporate bond market. Research suggests that illiquidity can substantially impact...
Apr 1, 2007 · We find that the majority of the corporate spread is due to default risk. This result holds for all rating categories and is robust to the definition of the riskless curve. We also find that the nondefault component is time varying and strongly related to measures of bond-specific illiquidity as
Apr 1, 2023 · While default is an important component of yield spreads, it may not be the only determinant. Although elegant in theory, many studies (including those noted above) have found that the structural credit risk models cannot fully capture corporate bond yield spreads in practice.
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Aug 1, 2014 · Our findings suggest that liquidity has a significant effect on corporate bond yields, supporting past research that uses these proxies to control for liquidity in bond spread regressions. However, our results also indicate that proxies for liquidity often capture credit risk as well as liquidity.
