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Is Liquidity Reflected in Bond Yields? Evidence from the Euro Corporate Bond Market

Author

Listed:
  • Patrick Houweling

    (Erasmus University Rotterdam and Rabobank International)

  • Albert Mentink

    (Erasmus University Rotterdam and AEGON Asset Management)

  • Ton Vorst

    (Erasmus University Rotterdam and ABN Amro)

Abstract

We test whether liquidity is priced in the euro-denominated corporate bond market. We use the Arbitrage Pricing Theory to control for other sources of risk. Yields are used to measure the bonds' expected returns and liquidity is approximated by four indirect measures: issued amount, age, number of quotes and dispersion of quotes. Our results show that significant pricing anomalies due to liquidity exist for euro- denominated bonds. We find that the yield premium between liquid and illiquid bonds ranges from 0.2 to 47 basis points, depending on which liquidity indicator is used.

Suggested Citation

  • Patrick Houweling & Albert Mentink & Ton Vorst, 2002. "Is Liquidity Reflected in Bond Yields? Evidence from the Euro Corporate Bond Market," Finance 0206001, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0206001
    Note: Type of Document - PDF; prepared on PC; pages: 30
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0206/0206001.pdf
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    Citations

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    Cited by:

    1. van Landschoot, A., 2003. "The Term Structure of Credit Spreads on Euro Corporate Bonds," Discussion Paper 2003-046, Tilburg University, Center for Economic Research.
    2. van Landschoot, A., 2003. "The Term Structure of Credit Spreads on Euro Corporate Bonds," Other publications TiSEM f5164bb2-6597-48c4-8b44-d, Tilburg University, School of Economics and Management.
    3. Jacoby, Gady & Shiller, Ilona, 2005. "Bond elasticity under liquidation risk," Research in International Business and Finance, Elsevier, vol. 19(3), pages 351-364, September.
    4. Roger WALDER, 2002. "Interactions Between Market and Credit Risk: Modeling the Joint Dynamics of Default-Free and Defaultable Bond Term Structures," FAME Research Paper Series rp56, International Center for Financial Asset Management and Engineering.
    5. Diaz, Antonio & Merrick, John Jr. & Navarro, Eliseo, 2006. "Spanish Treasury bond market liquidity and volatility pre- and post-European Monetary Union," Journal of Banking & Finance, Elsevier, vol. 30(4), pages 1309-1332, April.
    6. Yu, Fan, 2005. "Accounting transparency and the term structure of credit spreads," Journal of Financial Economics, Elsevier, vol. 75(1), pages 53-84, January.

    More about this item

    Keywords

    corporate bonds; liquidity; spreads; yields; euro;
    All these keywords.

    JEL classification:

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

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