The Illiquidity of Corporate Bonds
Author(s)
Bao, Jack; Pan, Jun; Wang, Jiang
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This paper examines the illiquidity of corporate bonds and its asset-pricing implications. Using transactions data from 2003 to 2009, we show that the illiquidity in corporate bonds is substantial, significantly greater than what can be explained by bid–ask spreads. We establish a strong link between bond illiquidity and bond prices. In aggregate, changes in market-level illiquidity explain a substantial part of the time variation in yield spreads of high-rated (AAA through A) bonds, overshadowing the credit risk component. In the cross-section, the bond-level illiquidity measure explains individual bond yield spreads with large economic significance.
Date issued
2011-06Department
Sloan School of ManagementJournal
Journal of Finance
Publisher
American Finance Association/John Wiley & Sons, Inc.
Citation
Bao, Jack, Jun Pan, and Jiang Wang. “The Illiquidity of Corporate Bonds.” The Journal of Finance 66.3 (2011): 911–946. Web.
Version: Author's final manuscript
ISSN
0022-1082
1540-6261