Abstract
This paper reexamines determinants of changes in the corporate bond yield spread, using transaction-based data on prices of US corporate bonds from the Trade Reporting and Compliance Engine (TRACE) over the period 2002-2009. We identify a new liquidity measure that has a significant and robust power in explaining corporate bond spread changes and more importantly that outperforms the existing corporate bond liquidity measures. We also show that the explanatory power of liquidity is actually reduced in the crisis period once credit risk is controlled for.
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