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Spread Determinants in Corporate Bond Pricing: The Effect of Market and Liquidity Risks

Author

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  • Menevşe Özdemir Dilidüzgün
  • Ayşe Altıok Yılmaz
  • Elif Akben Selçuk

Abstract

This paper investigates the effect of market and liquidity risks on corporate bond pricing in Turkey, an emerging market, and in Europe. Results show that corporate bond returns have exposure to liquidity factors and not to market factors in both settings. Corporate bonds issued in Turkey have significant exposure to fluctuations in benchmark treasury bond liquidity and corporate bond market liquidity; while corporate bonds issued in Eurozone have exposure to equity market liquidity and are sensitive to fluctuations in a 10-year generic government bond liquidity. The total estimated liquidity risk premium is 0.7% per annum for Turkish “A” and above graded corporate bonds, and 1.08% for the last investment grade level (BBB-) long term bonds. For Eurozone, the total liquidity risk premium is 0.27% for investment grade 5-10 year term bonds, 1.05% for high-yield 1-5 year term bonds and 1.02% for high-yield 5-10 year term category. Key words: Corporate bond, Liquidity risk, Credit spread, Risk premium. JEL: G12, G13.

Suggested Citation

  • Menevşe Özdemir Dilidüzgün & Ayşe Altıok Yılmaz & Elif Akben Selçuk, 2022. "Spread Determinants in Corporate Bond Pricing: The Effect of Market and Liquidity Risks," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 69(3), pages 407-425.
    • Handle: RePEc:voj:journl:v:69:y:2022:i:3:p:407-425:id:1030
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    More about this item

    Keywords

    Corporate bond; Liquidity risk; Credit spread; Risk premium;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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