Abstract
I investigate commonality in liquidity and its implications for corporate bond pricing. I demonstrate the extent of liquidity commonality within and across the corporate bond and equity markets using latent liquidity factors. Shocks to systematic liquidity factors help explain time-series variation in yield spreads. Bonds with greater exposure to across-market liquidity shocks have higher spreads cross-sectionally. The results are robust to credit risk and liquidity level controls. High liquidity-beta bonds exhibit a larger CDS-bond basis, the difference between an issuer’s credit default swap premium and the bond-implied premium, suggesting that bond markets exhibit greater exposure to liquidity risk than CDS markets.
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