Heterogeneous Liquidity Effects in Corporate Bond Spreads

Among the many sources of risk explaining corporate bond spreads, the role of liquidity is the least well understood. This paper investigates the impact of liquidity risk of unknown functional form on the yield spread over time. Heterogeneity is introduced via a latent group structure explaining differences in nonlinear liquidity effects across groups. A key feature of the model is that it can be estimated from highly unbalanced longitudinal data, allowing us to work with data at minimum levels of temporal aggregation. In an extensive empirical study we apply the suggested method to a large panel of trade data for US corporate bonds. Our procedure identifies nonlinear liquidity effects for a large fraction of the securities. Nonlinearities become more pronounced as bond-idiosyncratic illiquidity increases. The classification clearly distinguishes groups differing e.g. in bond characteristics such as spread levels and trading activity. While groups share similar dynamics of liquidity effects, their magnitudes as well as the interplay between idiosyncratic and market illiquidity are different across groups.

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Document type	Document de travail (Working Paper)
Access type	Accès libre
Publication date	2016
Language	Anglais
Number of pages	29 pages
Collection	ISBA Discussion Paper - 2016/50
Affiliations	UCL - SSH/LIDAM/ISBA - Institut de Statistique, Biostatistique et Sciences Actuarielles UCL - SSH/LIDAM/CORE - Center for operations research and econometrics
Keywords	Yield Spread ; Liquidity Risk ; Classiffication of Regression Functions ; Semiparametric Panel Data Model
Links	http://hdl.handle.net/2078.1/185254[Handle]

See also
	[boreal:191387]	Heterogeneous Liquidity Effects in Corporate Bond Spreads