Bond Illiquidity and Excess Volatility
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Pan_Bond illiquidity.pdf
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340.54 KB
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Author(s)
Bao, Jack
Pan, Jun
Date Issued
July 2013
Journal
Review of Financial Studies
Publisher
John Wiley & Sons, Inc
Citation
Bao, J., and J. Pan. “Bond Illiquidity and Excess Volatility.” Review of Financial Studies 26, no. 12 (December 1, 2013): 3068–3103.
Version
Author's final manuscript
Abstract
We find that the empirical volatilities of corporate bond and CDS returns are higher than implied by equity return volatilities and the Merton model. This excess volatility may arise because structural models inadequately capture either fundamentals or illiquidity. Our evidence supports the latter explanation. We find little relation between excess volatility and measures of firm fundamentals and the volatility of firm fundamentals but some relation with variables proxying for time-varying illiquidity. Consistent with an illiquidity explanation, firm-level bond portfolio returns, which average out bond-specific effects, significantly decrease excess volatility.
MIT Department
Sloan School of Management
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Creative Commons Attribution-Noncommercial-Share Alike
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DOI of Published Version
https://doi.org/10.1093/rfs/hht037
