Illiquidity or Credit Deterioration: A Study of Liquidity in the USCorporate Bond Market during Financial Crises
We use a unique data-set to study liquidity effects in the US corporatebond market, covering more than 30,000 bonds. Our analysis explorestime-series and cross-sectional aspects of corporate bond yield spreads,with the main focus being on the quanti fication of the impact ofliquidity factors, while controlling for credit risk. Our time periodstarts in October 2004 when detailed transaction data from the TradeReporting and Compliance Engine (TRACE) became available. In particular,we examine three diff erent regimes during our sample period, theGM/Ford crisis in 2005 when a segment of the corporate bond market was affected, the sub-prime crisis since mid-2007, which was much morepervasive across the corporate bond market, and the period in between,when market conditions were more normal. We employ a wide range ofliquidity measures and fi nd in our time-series analysis that liquidityeff ects explain approximately one third of market-wide corporate yieldspread changes, in general, and are even more pronounced during periodsof crisis. In particular, the price dispersion measure proposed byJankowitsch, Nashikkar and Subrahmanyam (2008) explains about half ofthe aggregate bond yield spread changes during the sub-prime crisis. Ourdata-set allows us to examine in greater detail liquidity e ffects invarious segments of the market: financial sector fi rms which have beenparticularly aff ected by the crisis vs. industrial firms, investmentgrade vs. speculative grade bonds, and retail vs. institutional trades.In addition, our cross-sectional analysis shows that liquidity explainsa large part of the variation in yield spreads across bonds, afteraccounting for credit risk. These results yield important insightsregarding the liquidity drivers of corporate yield spreads, particularlyduring periods of crisis.
Year of publication: |
2009-09-03
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Authors: | Subrahmanyam, Marti ; Friewald, Nils ; Jankowitsch, Rainer |
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freely available
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