Liquidity risk and expected corporate bond returns |
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| Authors: | Hai Lin Junbo Wang Chunchi Wu |
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| Institution: | 1. Department of Finance & Quantitative Analysis, University of Otago, PO Box 56, Dunedin 9054, New Zealand;2. Department of Finance & Wang Yanan Institute for Studies in Economics (WISE), Xiamen University, China;3. College of Business, City University of Hong Kong, Kowloon, Hong Kong, SAR, China;4. School of Management, State University of New York at Buffalo, Buffalo, New York 14260, USA |
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| Abstract: | This paper studies the pricing of liquidity risk in the cross section of corporate bonds for the period from January 1994 to March 2009. The average return on bonds with high sensitivities to aggregate liquidity exceeds that for bonds with low sensitivities by about 4% annually. The positive relation between expected corporate bond returns and liquidity beta is robust to the effects of default and term betas, liquidity level, and other bond characteristics, as well as to different model specifications, test methodologies, and a variety of liquidity measures. The results suggest that liquidity risk is an important determinant of expected corporate bond returns. |
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| Keywords: | G12 G14 |
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