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Bond liquidity, debt maturity and bond risk premium

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  • Zhou, Yimin
  • Wei, Xu

Abstract

This paper investigates the effect of liquidity on bond risk premium in a model of endogenous debt maturity, in which a firm balances between rollover risk induced by short-term debt and liquidity risk of long-term bonds. Our model generates implications consistent with existing empirical findings. First, bond illiquidity can increase bond risk premium indirectly by increasing the amount of short-term debt and rollover risk, leading to comovement between liquidity risk premium and default risk premium. Second, bond illiquidity has a larger effect for lower-rating bonds. Our model also has new implications that can be tested by further empirical studies.

Suggested Citation

  • Zhou, Yimin & Wei, Xu, 2023. "Bond liquidity, debt maturity and bond risk premium," Finance Research Letters, Elsevier, vol. 54(C).
    • Handle: RePEc:eee:finlet:v:54:y:2023:i:c:s1544612323000909
    DOI: 10.1016/j.frl.2023.103716
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    References listed on IDEAS

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    More about this item

    Keywords

    Bond liquidity; Debt maturity; Risk premium; Rollover risk; Default risk;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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