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Liquidity Premium in the Eye of the Beholder: An Analysis of the Clientele Effect in the Corporate Bond Market

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  • Xuanjuan Chen

    (School of Finance, Shanghai University of Finance and Economics, Shanghai 200433, China)

  • Jing-Zhi Huang

    (Smeal College of Business, Pennsylvania State University, University Park, Pennsylvania 16802)

  • Zhenzhen Sun

    (Charlton College of Business, University of Massachusetts Dartmouth, Dartmouth, Massachusetts 02747)

  • Tong Yao

    (Henry B. Tippie College of Business, University of Iowa, Iowa City, Iowa 52240)

  • Tong Yu

    (Carl H. Lindner School of Business, University of Cincinnati, Cincinnatti, Ohio 45220)

Abstract

This paper examines how liquidity and investors’ heterogeneous liquidity preferences interact to affect asset pricing. Using data on insurers’ corporate bond holdings, we find that illiquidity of corporate bond portfolios varies widely and persistently across insurers and is related to insurers’ investment horizon and funding constraint, consistent with the notion of liquidity clientele. We further find that liquidity clientele affects corporate bond prices—specifically, liquidity premia are lower among corporate bonds heavily held by investors with weaker preference for liquidity.

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  • Xuanjuan Chen & Jing-Zhi Huang & Zhenzhen Sun & Tong Yao & Tong Yu, 2020. "Liquidity Premium in the Eye of the Beholder: An Analysis of the Clientele Effect in the Corporate Bond Market," Management Science, INFORMS, vol. 66(2), pages 932-957, February.
    • Handle: RePEc:inm:ormnsc:v:66:y:2020:i:2:p:932-957
    DOI: 10.1287/mnsc.2018.3179
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