Liquidity risk of corporate bond returns
By: Viral V. Acharya, Yakov Amihud, Sreedhar T. Bharath
Contributors: Bharath, Sreedhar T.; Bharath, Sreedhar T.; National Bureau of Economic Research
Series: NBER working paper series -- working paper 16394; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 16394.
Publisher: National Bureau of Economic Research
Published: 2010
Place of publication: Cambridge, MA
Language: eng
Format: [electronic resource] /
Description: "We study the exposure of the U.S.  corporate bond returns to liquidity shocks of stocks and treasury bonds over the period 1973 to 2007.  A decline in liquidity of stocks or Treasury bonds produces conflicting effects: Prices of investment-grade bonds rise while prices of speculative grade bonds fall substantially.  This effect is regime-switching in nature and holds when the state of the economy is in a "stress" regime.  The likelihood of being in such a regime can be predicted by macroeconomic and financial market variables that are associated with adverse economic conditions.  Our model can predict the out-of-sample bond returns for the stress years 2008-2009.  These effects are robust to controlling for other systematic risks (term and default).  Our findings suggest the existence of time-varying liquidity risk of corporate bond returns and episodes of flight to liquidity"--National Bureau of Economic Research web site.
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