The Term Structure of Illiquidity Premia

This paper investigates the dynamics of the term structure of bond market illiquidity premia. We analyze the comovement of short-, medium-, and long-termilliquidity premia and identify economic factors determining them. Our resultsshow that the term structure of illiquidity premia is U-shaped on average andvaries strongly over time. We document that different economic factors drivedifferent parts of the term structure. While the short end is driven by assetmarket volatilities, the long end depends on longer-term economic prospects.These results suggest that different parts of the term structure are determinedby different investor clienteles with different liquidity needs.[...]