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Is Liquidity Reflected in Bond Yields? Evidence from the Euro Corporate Bond Market

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Author Info
Patrick Houweling (Erasmus University Rotterdam and Rabobank International)
Albert Mentink (Erasmus University Rotterdam and AEGON Asset Management)
Ton Vorst (Erasmus University Rotterdam and ABN Amro)

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Abstract

We test whether liquidity is priced in the euro-denominated corporate bond market. We use the Arbitrage Pricing Theory to control for other sources of risk. Yields are used to measure the bonds' expected returns and liquidity is approximated by four indirect measures: issued amount, age, number of quotes and dispersion of quotes. Our results show that significant pricing anomalies due to liquidity exist for euro- denominated bonds. We find that the yield premium between liquid and illiquid bonds ranges from 0.2 to 47 basis points, depending on which liquidity indicator is used.

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File URL: http://129.3.20.41/eps/fin/papers/0206/0206001.pdf
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Publisher Info
Paper provided by EconWPA in its series Finance with number 0206001.

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Length: 30 pages
Date of creation: 10 Jun 2002
Date of revision:
Handle: RePEc:wpa:wuwpfi:0206001

Note: Type of Document - PDF; prepared on PC; pages: 30
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Web page: http://129.3.20.41

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Related research
Keywords: corporate bonds; liquidity; spreads; yields; euro;

Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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Cited by:
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  1. Landschoot, A. van, 2003. "The term structure of credit spreads on euro corporate bonds," Discussion Paper 46, Tilburg University, Center for Economic Research. [Downloadable!]
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