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Liquidity Premium in the Eye of the Beholder: An Analysis of the Clientele Effect in the Corporate Bond Market

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  • Xuanjuan Chen

    (School of Finance, Shanghai University of Finance and Economics, Shanghai 200433, China)

  • Jing-Zhi Huang

    (Smeal College of Business, Pennsylvania State University, University Park, Pennsylvania 16802)

  • Zhenzhen Sun

    (Charlton College of Business, University of Massachusetts Dartmouth, Dartmouth, Massachusetts 02747)

  • Tong Yao

    (Henry B. Tippie College of Business, University of Iowa, Iowa City, Iowa 52240)

  • Tong Yu

    (Carl H. Lindner School of Business, University of Cincinnati, Cincinnatti, Ohio 45220)

Abstract

This paper examines how liquidity and investors’ heterogeneous liquidity preferences interact to affect asset pricing. Using data on insurers’ corporate bond holdings, we find that illiquidity of corporate bond portfolios varies widely and persistently across insurers and is related to insurers’ investment horizon and funding constraint, consistent with the notion of liquidity clientele. We further find that liquidity clientele affects corporate bond prices—specifically, liquidity premia are lower among corporate bonds heavily held by investors with weaker preference for liquidity.

Suggested Citation

  • Xuanjuan Chen & Jing-Zhi Huang & Zhenzhen Sun & Tong Yao & Tong Yu, 2020. "Liquidity Premium in the Eye of the Beholder: An Analysis of the Clientele Effect in the Corporate Bond Market," Management Science, INFORMS, vol. 66(2), pages 932-957, February.
    • Handle: RePEc:inm:ormnsc:v:66:y:2020:i:2:p:932-957
    DOI: 10.1287/mnsc.2018.3179
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    3. Mohamed Amine Boutabba & Yves Rannou, 2020. "Investor strategies and Liquidity Premia in the European Green Bond market," Post-Print hal-02544451, HAL.
    4. Jansen, Kristy, 2021. "Essays on institutional investors, portfolio choice, and asset prices," Other publications TiSEM fd998408-d282-4e0f-b542-4, Tilburg University, School of Economics and Management.
    5. Eichfelder, Sebastian & Noack, Mona & Noth, Felix, 2022. "The impact of financial transaction taxes on stock markets: Short-run effects, long-run effects, and reallocation of trading activity," IWH Discussion Papers 12/2022, Halle Institute for Economic Research (IWH).
    6. Jiang, Hao & Li, Yi & Sun, Zheng & Wang, Ashley, 2022. "Does mutual fund illiquidity introduce fragility into asset prices? Evidence from the corporate bond market," Journal of Financial Economics, Elsevier, vol. 143(1), pages 277-302.
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    9. Jansen, Kristy & Werker, Bas J.M., 2022. "The shadow costs of illiquidity," Other publications TiSEM 45863ecf-b407-4cf5-960b-d, Tilburg University, School of Economics and Management.
    10. Nan Qin & Vijay Singal, 2023. "Effect of high‐frequency trading on mutual fund performance," The Financial Review, Eastern Finance Association, vol. 58(2), pages 369-394, May.
    11. Huang, Jing-Zhi & Wang, Yan & Wang, Ying, 2024. "Does ownership concentration affect corporate bond volatility? Evidence from bond mutual funds," Journal of Banking & Finance, Elsevier, vol. 165(C).
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    16. Ali Ebrahim Nejad & Saeid Hoseinzade & Aryan Molanaei, 2023. "Flight from Liquidity and Corporate Bond Yields," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 32(5), pages 255-283, December.
    17. Huang, Alan Guoming & Wermers, Russ & Xue, Jinming, 2023. ""Buy the rumor, sell the news": Liquidity provision by bond funds following corporate news events," CFR Working Papers 23-07, University of Cologne, Centre for Financial Research (CFR).

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