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Investor Composition and the Liquidity Component in the U.S. Corporate Bond Market

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  • JIAN LI
  • HAIYUE YU

Abstract

The link between corporate bond credit spreads and secondary market illiquidity in the cross section has grown stronger since 2005, resulting in a higher liquidity component in credit spreads. Using U.S. investor holdings data, we show that short‐term investors (e.g., mutual funds/exchange‐traded funds [ETFs]) increase trading activities in the secondary market, amplifying the effect of secondary market frictions on prices. We provide a model featuring heterogeneous investors with different trading needs and heterogeneous bonds to investigate the impact of the rapid‐growing mutual fund/ETF sector on the corporate bond market. We find the change in investor composition can quantitatively explain the aggregate trend.

Suggested Citation

  • Jian Li & Haiyue Yu, 2026. "Investor Composition and the Liquidity Component in the U.S. Corporate Bond Market," Journal of Finance, American Finance Association, vol. 81(2), pages 871-922, April.
    • Handle: RePEc:bla:jfinan:v:81:y:2026:i:2:p:871-922
    DOI: 10.1111/jofi.70024
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