An Asset Pricing Approach to Liquidity Effects in Corporate Bond Markets

Dion Bongaerts; Frank de Jong; Joost Driessen

doi:10.1093/rfs/hhx005

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An Asset Pricing Approach to Liquidity Effects in Corporate Bond Markets

Dion Bongaerts¹; Frank de Jong²; Joost Driessen²

¹ Rotterdam School of Management Erasmus University · ² Tilburg University

Review of Financial Studies 2017 open access

We use an asset pricing approach to compare the effects of the liquidity level and liquidity risk on expected U.S. corporate bond returns. Using signed transaction data, we estimate effective transaction costs for bond portfolios by a repeat-sales method. We find that the liquidity level and exposure to equity market liquidity risk affect expected bond returns. In contrast, exposure to corporate bond liquidity shocks carries an economically negligible risk premium. A simulation study shows that it is unlikely that our results are driven by measurement error in betas or multicollinearity. We present a simple theoretical model that explains these findings.

DOI: 10.1093/rfs/hhx005
Volume: 30 (4)
Pages: 1229-1269
Language: en
Export: BibTeX
Sources: openalex crossref