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Cyclical variations in liquidity risk of corporate bonds

Author

Listed:
  • Anténor-Habazac, Cassandre

    (HEC Montreal, Canada Research Chair in Risk Management)

  • Dionne, Georges

    (HEC Montreal, Canada Research Chair in Risk Management)

  • Guesmi, Sahar

    (HEC Montreal, Department of Decision science)

Abstract

We study regime switching features of liquidity risk in corporate bond premiums. Within a sample period ranging from July 2002 to April 2015, we first compute a liquidity risk index for BBB bonds, which considers various liquidity risk facets based on principal component analysis. Second, we identify two liquidity regimes in our sample using a Markov switching regime model that highlights the dynamic characteristics of this risk and its behavior before, during and after the last financial crisis. We observe that the liquidity risk index improved after the financial crisis. It seems that the recent Volcker Rule did not affect the liquidity of BBB bonds during our sample period.

Suggested Citation

  • Anténor-Habazac, Cassandre & Dionne, Georges & Guesmi, Sahar, 2018. "Cyclical variations in liquidity risk of corporate bonds," Working Papers 18-3, HEC Montreal, Canada Research Chair in Risk Management.
    • Handle: RePEc:ris:crcrmw:2018_003
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    References listed on IDEAS

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    More about this item

    Keywords

    Liquidity risk; corporate bonds; financial crisis; regime change; Markov model; principal component analysis;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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