Liquidity Premium in the Eye of the Beholder: An Analysis of the Clientele Effect in the Corporate Bond Market

Chen, Xuanjuan; Huang, Jing-Zhi; Sun, Zhenzhen; Yao, Tong; Yu, Tong

doi:10.1287/mnsc.2018.3179

Cited by 35 publications

(18 citation statements)

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“…Recent papers have documented empirical clientele effects in other aspects of the corporate bond market. Chen et al (2020) confirm the concave relation between corporate bond illiquidity and default-adjusted corporate bond yield spreads. They find that among insurance company investors, the different preferences for liquidity affect the credit spread of the bonds that insurance companies hold.…”

Section: Related Literaturesupporting

confidence: 64%

The Importance of Investor Heterogeneity: An Examination of the Corporate Bond Market

2021

SSRN Journal

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Corporate bond market participants are increasingly worried about liquidity. However, bidask spreads and other standard measures indicate liquidity has not deteriorated significantly. This paper proposes a potential reconciliation. We show the sensitivity of credit yields to bid-ask spreads increased fourfold from 2005 to 2019. We then provide a model that connects this change to the rapid growth of mutual funds in the corporate bond market. The model features heterogeneous investors with different trading needs who choose between a risk-free asset and illiquid bonds. As the risk-free rate declines, more short-term investors reach for yield and enter the bond market. These short-term investors reduce the selling pressure in each sub-market and so the bid-ask spreads. However, their greater trading needs amplify the sensitivity of credit yields to the bid-ask spreads, leading to a larger liquidity component.We next test the model's predictions using detailed data on investor holdings in the U.S. As predicted, we find investor turnover is associated with larger effects of illiquidity on credit yields. Bonds with more short-term investors are traded at lower bid-ask spreads, but their credit yields are more sensitive to the bid-ask spreads. Finally, we look across countries and show that, consistent with the model, larger declines in risk-free rates are associated with higher growth in mutual fund shares. These results highlight the key role that investor heterogeneity plays in determining how liquidity is priced into corporate bond yields and firms' financing conditions. viii

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Section: Related Literaturesupporting

confidence: 64%

The Importance of Investor Heterogeneity: An Examination of the Corporate Bond Market

2021

SSRN Journal

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“…The reason for this is asset insulators hold securities through price fluctuations and, as such, trade less. This is also in line with evidence in Chen, Huang, Sun, Yao, and Yu (2019) that insurers who hold a more illiquid bond portfolio tend to have lower portfolio turnover. Being an asset insulator is related to holding an illiquid portfolio.…”

Section: Resultssupporting

confidence: 91%

Interest rate risk of life insurers: Evidence from accounting data

Möhlmann

2020

Financial Management

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Life insurers are exposed to interest rate risk as their liability side is typically more sensitive to interest rate changes than their asset side. This paper explores why insurers assume this risk using a new accounting-based method to measure the interest rate sensitivity of assets and liabilities. Calculation at the insurer level yields a wide duration gap with pronounced heterogeneity in the cross-section.This could be explained by alternative investment strategies, such as asset insulation, which are at odds with interest rate risk management. Using a 2014-2018 panel, factors associated with interest rate risk support this view.

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“…Our results suggest that the French FTT significantly increased trading volumes of substitute stocks with low transaction costs. We interpret that as direct evidence for liquidity clientele effects (Amihud and Mendelson, 1986;Chen et al, 2020) of the French FTT that support the findings of Colliard and Hoffmann (2017).…”

Section: Introductionsupporting

confidence: 82%

“…Third, augmenting Colliard and Hoffmann (2017), we find more potent substitution effects for (untreated) substitute SLP stocks than for substitute non-SLP stocks. Thereby, we provide evidence for liquidity clientele effects as the reason for the observed heterogeneity in FTT effects on trading activity (Amihud and Mendelson, 1986;Chen et al, 2020).…”

Section: Introductionmentioning

confidence: 58%

“…Amihud and Mendelson (1986) predict and provide evidence for a liquidity clientele effect whereby investors with short holding periods select assets with low trading costs. If investors with high trading frequencies adjust their portfolios due to a shock in trading costs, the liquidity clientele effect suggests that they will reduce stockholdings with high trading costs and increase stockholdings with low trading costs (Colliard and Hoffmann, 2017;Chen et al, 2020). This provides a theoretical argument why the French FTT has a more substantial effect on trading volumes of less liquid stocks that did not participate in the SLP program.…”

Section: Theory and Hypothesesmentioning

confidence: 99%

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The Impact of Financial Transaction Taxes on Stock Markets: Short-Run Effects, Long-Run Effects, and Reallocation of Trading Activity

Eichfelder¹,

Noack²,

Noth³

2022

National Tax Journal

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The responsibility for discussion papers lies solely with the individual authors. The views expressed herein do not necessarily represent those of IWH. The papers represent preliminary work and are circulated to encourage discussion with the authors. Citation of the discussion papers should account for their provisional character; a revised version may be available directly from the authors.Comments and suggestions on the methods and results presented are welcome.IWH Discussion Papers are indexed in RePEc-EconPapers and in ECONIS.

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Liquidity Premium in the Eye of the Beholder: An Analysis of the Clientele Effect in the Corporate Bond Market

Cited by 35 publications

References 50 publications

The Importance of Investor Heterogeneity: An Examination of the Corporate Bond Market

The Importance of Investor Heterogeneity: An Examination of the Corporate Bond Market

Interest rate risk of life insurers: Evidence from accounting data

The Impact of Financial Transaction Taxes on Stock Markets: Short-Run Effects, Long-Run Effects, and Reallocation of Trading Activity

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