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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/28293
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| Title: | Illiquidity or Credit Deterioration: A Study of Liquidity in the US
Corporate Bond Market during Financial Crises |
| Authors: | Subrahmanyam, Marti
Friewald, Nils
Jankowitsch, Rainer |
| Issue Date: | 3-Sep-2009 |
| Series/Report no.: | FIN-09-009 |
| Abstract: | We use a unique data-set to study liquidity effects in the US corporate
bond market, covering more than 30,000 bonds. Our analysis explores
time-series and cross-sectional aspects of corporate bond yield spreads,
with the main focus being on the quanti fication of the impact of
liquidity factors, while controlling for credit risk. Our time period
starts in October 2004 when detailed transaction data from the Trade
Reporting and Compliance Engine (TRACE) became available. In particular,
we examine three diff erent regimes during our sample period, the
GM/Ford crisis in 2005 when a segment of the corporate bond market was a
ffected, the sub-prime crisis since mid-2007, which was much more
pervasive across the corporate bond market, and the period in between,
when market conditions were more normal. We employ a wide range of
liquidity measures and fi nd in our time-series analysis that liquidity
eff ects explain approximately one third of market-wide corporate yield
spread changes, in general, and are even more pronounced during periods
of crisis. In particular, the price dispersion measure proposed by
Jankowitsch, Nashikkar and Subrahmanyam (2008) explains about half of
the aggregate bond yield spread changes during the sub-prime crisis. Our
data-set allows us to examine in greater detail liquidity e ffects in
various segments of the market: financial sector fi rms which have been
particularly aff ected by the crisis vs. industrial firms, investment
grade vs. speculative grade bonds, and retail vs. institutional trades.
In addition, our cross-sectional analysis shows that liquidity explains
a large part of the variation in yield spreads across bonds, after
accounting for credit risk. These results yield important insights
regarding the liquidity drivers of corporate yield spreads, particularly
during periods of crisis. |
| URI: | http://hdl.handle.net/2451/28293 |
| Appears in Collections: | Finance Working Papers
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