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Stories of Liquidity and Credit

In: Market Liquidity Risk

Author

Listed:
  • Andria Merwe

Abstract

In 1959, Professor Lawrence Fisher1 presented a hypothesis about the determinants of the risk premium on corporate bonds.2 Fisher showed that the average risk premium, defined as the yield differential between a corporate bond and the risk-free rate, depends on two factors. The first factor reflects the default risk or creditworthiness of the issuer. It captures the basic idea that the lender will get their money back. Incidentally, this factor has dominated our thinking about bonds in general and corporate bonds in particular. But Fisher also considered the “marketability” or liquidity of the bond, defined as the market value of the firms outstanding bonds traded in the secondary market, to contribute to the risk premium.3 If Fisher introduced the idea of “marketability” in the middle of the last century, why have we for the most part ignored bond market liquidity?

Suggested Citation

  • Andria Merwe, 2015. "Stories of Liquidity and Credit," Palgrave Macmillan Books, in: Market Liquidity Risk, chapter 5, pages 115-142, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-137-38923-7_5
    DOI: 10.1057/9781137389237_5
    as

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