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Corporate bond liquidity before and after the onset of the subprime crisis

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  • Dick-Nielsen, Jens
  • Feldhütter, Peter
  • Lando, David

Abstract

We analyze liquidity components of corporate bond spreads during 2005–2009 using a new robust illiquidity measure. The spread contribution from illiquidity increases dramatically with the onset of the subprime crisis. The increase is slow and persistent for investment grade bonds while the effect is stronger but more short-lived for speculative grade bonds. Bonds become less liquid when financial distress hits a lead underwriter and the liquidity of bonds issued by financial firms dries up under crises. During the subprime crisis, flight-to-quality is confined to AAA-rated bonds.

Suggested Citation

  • Dick-Nielsen, Jens & Feldhütter, Peter & Lando, David, 2012. "Corporate bond liquidity before and after the onset of the subprime crisis," Journal of Financial Economics, Elsevier, vol. 103(3), pages 471-492.
  • Handle: RePEc:eee:jfinec:v:103:y:2012:i:3:p:471-492
    DOI: 10.1016/j.jfineco.2011.10.009
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    References listed on IDEAS

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    More about this item

    Keywords

    Corporate bonds; Liquidity; Liquidity risk; Subprime crisis;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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