Journal of Financial and Quantitative Analysis Vol. 53 No. 5 2018
The Term Structure of Bond Liquidity
Abstract
We analyze the impact of market frictions on the trading volume and liquidity premia of finite-maturity assets when investors differ in their trading needs. Our equilibrium model generates a clientele effect (frequently trading investors hold only short-term assets) and predicts i) a hump-shaped relation between trading volume and maturity, ii) lower trading volumes of older compared with younger assets, iii) an increasing liquidity term structure from ask prices, iv) a decreasing or U-shaped liquidity term structure from bid prices, and v) spillovers of liquidity from short-term to long-term maturities. Empirical tests for U.S. corporate bonds support our theoretical predictions.
- DOI
- 10.1017/s0022109018000364
- Volume
- 53
- Issue
- 5
- Pages
- 2161-2197
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref