Abstract - An asset pricing approach to liquidity effects in corporate bond markets
We empirically analyze the asset pricing implications of expected liquidity and liquidity risk in the US corporate bond market. Liquidity measures across various bond portfolios are constructed using a Bayesian approach to estimate Roll's effective cost measure. We find strong evidence that corporate bond returns are exposed to systematic liquidity risk. Expected corporate bond returns are, however, mainly affected by expected liquidity, and much less by liquidity risk premia. The estimated liquidity effects explain a substantial part of the credit spread puzzle.
Frank De Jong