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The term structure of illiquidity premia

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  • Kempf, Alexander
  • Korn, Olaf
  • Uhrig-Homburg, Marliese

Abstract

We investigate the term structure of bond market illiquidity premia and show that the term structure varies greatly over time. Short and long end are strictly separated suggesting that different economic factors drive different parts of the term structure. We propose a stylized theoretical model which implies that current trading needs of investors determine the short end. The long-term risk of being forced to liquidate bond positions determines the long end. Empirical evidence supports these predictions. While short-term liquidation risk captured by asset market volatilities drives the short end, the long end depends on the long-term economic outlook.

Suggested Citation

  • Kempf, Alexander & Korn, Olaf & Uhrig-Homburg, Marliese, 2012. "The term structure of illiquidity premia," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1381-1391.
    • Handle: RePEc:eee:jbfina:v:36:y:2012:i:5:p:1381-1391
    DOI: 10.1016/j.jbankfin.2011.12.003
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    More about this item

    Keywords

    Bond liquidity; Liquidity risk; Term structure of illiquidity premia;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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