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Sep 13, 2022 · A number of factors have the potential to put pressure on bond liquidity. These include selling pressure (a rush to the exits by bond owners) and limited dealer inventory (supply) of bonds. The central bank—the Fed—can also put pressure on liquidity when, for instance, it tightens up its balance sheet by declining to purchase new Treasury ...
- Common (Systematic) Liquidity in The Market
- The Bond’s Specific (Idiosyncratic) Liquidity
- The Bottom Line
Evidence presents a strong connection between systematic liquidity risk (also known as common liquidity risk) and the pricing of securities in the corporate bond market. Evidence also indicates that illiquidity can materially affect yield spreads, which dramatically widen during times of market volatility. In fact, a study conducted by Friewald et ...
Heck et al. identified a significant relationship between yield spreads and bond illiquidity. Their study specifically found that idiosyncratic behavior exhibited by the liquidity of some corporate bonds may be simply due to the closed nature of the market, where investors are unlikely to invest in the bonds, either because they are unaware of thei...
Numerous studies have demonstrated that illiquidity is priced in corporate bond yields. Hence, liquidity significantly influences the corporate bond market and should be closely monitored by both private and institutional investors. Liquidity riskis a highly complex subject matter that requires in-depth professional analysis.
Jun 4, 2024 · Bond Liquidity. One of the challenges that bond investors face is assessing the liquidity of a bond, or how easily it can be bought or sold in the market. Bond liquidity can affect the price, yield, and risk of a bond, as well as the availability and cost of financing. However, unlike stocks, bonds do not trade on centralized exchanges, but ...
Bond Market Liquidity. Market liquidity is a market's ability to facilitate the purchase or sale of an asset without causing drastic change in the asset's price. So, an asset's market liquidity describes an asset's ability to sell quickly without having to reduce its price to a significant degree. Bond market liquidity therefore refers to the ...
Matrix Pricing. Bond pricing is set at the margin. What this means is that most bonds do not trade daily, but those that do set the price and liquidity for the rest of the market. While you may sell a small position and not move the market, the largest positions will set the price for all bonds in their categories.
Jun 18, 2024 · It represents the additional return that investors demand for holding less liquid assets, such as bonds, compared to more liquid alternatives. In this section, we'll delve into the intricacies of liquidity premium, exploring its significance, determinants, and impact on bond prices. 1. The Nature of Liquidity Premium.
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Oct 1, 2021 · Auh et al. (2018) and Newman and Rierson (2004) provide evidence that new corporate bond offerings affect the prices of similar existing bonds. Krishnamurthy (2002) argues that if the supply of a new bond does not satiate the demand for it, some investors will substitute into the old bond as well. This implies that when the opposite situation ...
