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(Il)liquidity premium in credit markets: a myth?

Journal

Journal of Fixed Income

Subject

Accounting

Publishing details

Journal of Fixed Income 2019 Winter Vol 28:3 p 3-31

Authors / Editors

Richardson S;Palhares D

Biographies

Scott Richardson

Publication Year

2019

Abstract

Across multiple measures of “liquidity” and a variety of methods to control for correlated characteristics of more (less) liquid bonds, we find only limited evidence of a liquidity premium in the cross section of corporate bonds. Specifically, although illiquid bonds have slightly higher credit spreads and directionally higher average returns, portfolios that tilt toward (away from) less (more) liquid bonds exhibit considerably higher levels of volatility. Economically, the low Sharpe ratios of illiquidity factor–mimicking portfolios are hard to justify for an investor. This is puzzling, as theory suggests investors should demand a risk premium for holding less-liquid assets.

Publication Notes

© 2018 IPR Journals. All rights reserved.

Available on ECCH

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