Advanced Search
MyIDEAS: Login to save this paper or follow this series

Endogenous Liquidity and Defaultable Bonds

Contents:

Author Info

  • Zhiguo He
  • Konstantin Milbradt
Registered author(s):

    Abstract

    This paper studies the interaction between fundamental and liquidity for defaultable corporate bonds that are traded in an over-the-counter secondary market with search frictions. Bargaining with dealers determines a bond's endogenous liquidity, which depends on both the firm fundamental and the time-to-maturity of the bond. Corporate default decisions interact with the endogenous secondary market liquidity via the rollover channel. A default-liquidity loop arises: Earlier endogenous default worsens a bond's secondary market liquidity, which amplifies equity holders' rollover losses, which in turn leads to earlier endogenous default. Besides characterizing in closed form the full inter-dependence between liquidity premium and default premium for credit spreads, we also study the optimal maturity implied by the model based on the tradeoff between liquidity provision and inefficient default.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.nber.org/papers/w18408.pdf
    Download Restriction: Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html. Free access is also available to older working papers.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18408.

    as in new window
    Length:
    Date of creation: Sep 2012
    Date of revision:
    Handle: RePEc:nbr:nberwo:18408

    Note: AP CF EFG
    Contact details of provider:
    Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Email:
    Web page: http://www.nber.org
    More information through EDIRC

    Related research

    Keywords:

    Find related papers by JEL classification:

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Paul Schultz, 2001. "Corporate Bond Trading Costs: A Peek Behind the Curtain," Journal of Finance, American Finance Association, American Finance Association, vol. 56(2), pages 677-698, 04.
    2. Amy K. Edwards & Lawrence E. Harris & Michael S. Piwowar, 2007. "Corporate Bond Market Transaction Costs and Transparency," Journal of Finance, American Finance Association, American Finance Association, vol. 62(3), pages 1421-1451, 06.
    3. Guillaume Rocheteau & Ricardo Lagos, 2008. "Liquidity in asset markets with search frictions," Working Paper, Federal Reserve Bank of Cleveland 0804, Federal Reserve Bank of Cleveland.
    4. Black, Fischer & Cox, John C, 1976. "Valuing Corporate Securities: Some Effects of Bond Indenture Provisions," Journal of Finance, American Finance Association, American Finance Association, vol. 31(2), pages 351-67, May.
    5. Long Chen & David A. Lesmond & Jason Wei, 2007. "Corporate Yield Spreads and Bond Liquidity," Journal of Finance, American Finance Association, American Finance Association, vol. 62(1), pages 119-149, 02.
    6. Lasse Heje Pederson & Markus K Brunnermeier, 2007. "Market Liquidity and Funding Liquidity," FMG Discussion Papers, Financial Markets Group dp580, Financial Markets Group.
    7. Hayne E. Leland., 1994. "Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Research Program in Finance Working Papers, University of California at Berkeley RPF-233, University of California at Berkeley.
    8. Dimitri Vayanos & Pierre-Olivier Weill, 2006. "A Search-Based Theory of the On-the-Run Phenomenon," NBER Working Papers, National Bureau of Economic Research, Inc 12670, National Bureau of Economic Research, Inc.
    9. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, Elsevier, vol. 17(2), pages 223-249, December.
    10. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, Econometric Society, vol. 53(6), pages 1315-35, November.
    11. Diamond, Douglas W., 1993. "Seniority and maturity of debt contracts," Journal of Financial Economics, Elsevier, Elsevier, vol. 33(3), pages 341-368, June.
    12. Green, Richard C. & Hollifield, Burton & Schurhoff, Norman, 2007. "Dealer intermediation and price behavior in the aftermarket for new bond issues," Journal of Financial Economics, Elsevier, Elsevier, vol. 86(3), pages 643-682, December.
    13. Olivier Renault & Jan Ericsson, 2000. "Liquidity and Credit Risk," FMG Discussion Papers, Financial Markets Group dp362, Financial Markets Group.
    14. Ricardo Lagos & Guillaume Rocheteau, 2007. "Search in Asset Markets: Market Structure, Liquidity, and Welfare," American Economic Review, American Economic Association, American Economic Association, vol. 97(2), pages 198-202, May.
    15. Asher Wolinsky & Stephan Lauermann, 2009. "Search with Adverse Selection," 2009 Meeting Papers, Society for Economic Dynamics 827, Society for Economic Dynamics.
    16. Hayne E. Leland and Klaus Bjerre Toft., 1995. "Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads," Research Program in Finance Working Papers, University of California at Berkeley RPF-259, University of California at Berkeley.
    17. Francis A. Longstaff & Sanjay Mithal & Eric Neis, 2004. "Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit-Default Swap Market," NBER Working Papers, National Bureau of Economic Research, Inc 10418, National Bureau of Economic Research, Inc.
    18. Lawrence R. Glosten & Paul R. Milgrom, 1983. "Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    19. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, American Finance Association, vol. 32(2), pages 261-75, May.
    20. Ing-Haw Cheng & Konstantin Milbradt, 2012. "The Hazards of Debt: Rollover Freezes, Incentives, and Bailouts," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 25(4), pages 1070-1110.
    21. Alessandro Beber & Michael W. Brandt & Kenneth A. Kavajecz, 2006. "Flight-to-Quality or Flight-to-Liquidity? Evidence From the Euro-Area Bond Market," NBER Working Papers, National Bureau of Economic Research, Inc 12376, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:18408. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.