Abstract
This paper examines liquidity pricing in emerging market corporate bonds that are traded in the US market. Average market-wide effective bid-ask spreads are 0.51%, and rise to 1.12% during the financial crisis. Using time series regressions, we find that portfolios with illiquid bonds perform worst when market liquidity deteriorates. Fama-MacBeth regressions with forward looking expected returns as the dependent variable show evidence in favor of a negatively priced liquidity risk factor, which is in accordance with standard theory. Portfolio characteristics proxying for the liquidity level are also important determinants of the cross-sectional variation in expected returns of emerging market corporate bonds, and reduce the effect of the liquidity risk factor. The results for a matching sample of US bonds show a different pattern: with only market risk and liquidity risk factors, the price of liquidity risk is counter-intuitively positive. When controlling for liquidity level proxies, the liquidity risk premium vanishes for the US bonds.
Published Version
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call