Abstract - Corporate bond liquidity before and after the onset of the subprime crisis
We analyze liquidity components of corporate bond spreads by combining the superior data quality of transaction-level corporate bond prices from TRACE with the natural experiment provided by
the onset of the sub-prime crisis. Illiquidity premia increased dramatically at the onset of the crisis. This is due to an increase in the level and the response of the key liquidity proxies which are the price impact of trades, transaction costs and the variability of these two variables, i.e. liquidity risk. A single linear combination of these four variables captures most of the liquidity-related variation of spreads.
The ability to separate large trades from small trades strongly affects
the measurement of the price impact of trades. We also obtain new
insights on the measurement and impact of trading frequency.
Copenhagen Business School