(Il)liquidity premium in credit markets: a myth?
Journal
Journal of Fixed Income
Subject
Accounting
Publishing details
Authors / Editors
Richardson S;Palhares D
Biographies
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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