Comparing possible proxies of corporate bond liquidity

Abstract

We consider eight different proxies (issued amount, coupon, listed, age, missing prices, yield volatility, number of contributors and yield dispersion) to measure corporate bond liquidity and use a five-variable model to control for interest rate risk, credit risk, maturity, rating and currency differences between bonds. The null hypothesis that liquidity risk is not priced in our data set of euro corporate bonds is rejected for seven out of eight liquidity proxies. We find significant liquidity premia, ranging from 9 to 24 basis points. A comparison test between liquidity proxies shows limited differences between the proxies. JEL codes:C13, G12

Determinants of bond tender premiums and the percentage tendered

“…Empirical analyses of bond prices, yields, and bid-ask spreads are consistent with this view (see e.g., Sarig and Warga, 1989;Amihud and Mendelson, 1991;Beim, 1992;Elton and Green, 1998;Houweling et al, 2005). Given this evidence, we expect that investors will be less willing to tender older, more seasoned, debt securities.…”

Determinants of yield spread dynamics: Euro versus US dollar corporate bonds

“…However, Amihud and Mendelson (1986) and Easley et al (2002) argue that liquidity is priced because investors maximize expected returns net of transactions (or liquidity) costs. Several studies including Collin-Dufresne et al (2001), Perraudin and Taylor (2003), Houweling et al (2005), and Longstaff et al (2005) conclude that (changes in) yield spreads are significantly affected by liquidity risk. de Jong and Driessen (2006) find similar results for expected returns on euro and US dollar corporate bonds.…”

Hedge fund return sensitivity to global liquidity

“…De Jong and Driessen (2007) apply the Amihud (2002) measure as well as bid ask spreads of treasuries to proxy for liquidity in the fixed income space and find that liquidity risk is priced in bond yields. A large range of liquidity factors (among others, quoted bid-ask spread, effective bid-ask spread, trade frequency, and quote frequency) is analyzed by Houweling, Mentink, and Vorst (2005) and found to have a substantial impact on bond yields. to the measure by Pastor and Stambaugh (2003) as…”

“…High-frequency measures are mostly used in market microstructure research, which is not the topic of our analysis. Instead we touch on topics from asset pricing research, which typically concentrates on the link between liquidity factors and asset returns (compare, e.g., Amihud, 2002;Pastor and Stambaugh, 2003;Houweling, Mentink, and Vorst, 2005;or Loderer and Roth, 2005). In this article, we study the link between liquidity and hedge fund returns.…”