Corporate Bond Liquidity Research Articles

Economic Policy Uncertainty and Corporate Bond Liquidity

Economic Policy Uncertainty and Corporate Bond Liquidity

Can Mutual Funds Harvest Corporate Bond Liquidity Premia?

Can Mutual Funds Harvest Corporate Bond Liquidity Premia?

Liquidity of corporate bonds and credit spread

We examine corporate bond liquidity's impact on credit spreads for listed companies in China. An empirical study is conducted by selecting monthly trading data of the listed company bond market from January 2011 to June 2020. It is found that the better the liquidity of listed corporate bonds in China, the smaller the risk compensation required by investors and the smaller the credit spread. This effect is more significant in periods of illiquidity. In addition, only the liquidity of corporate bonds issued by issuers in less economically developed regions significantly affects credit spreads.

Lighting Up the Dark: Liquidity in the German Corporate Bond Market

We study market liquidity in the markets for German and US corporate bonds, providing a comparative analysis of liquidity in two over-the-counter (OTC) bond markets with different characteristics. We employ a unique regulatory dataset of transactions by German financial institutions from 2008 to 2014 to find, first, that overall trading activity is much lower in the German market than in the US. Second, much like in the US, the determinants of German corporate bond liquidity are in line with OTC-market search theories. Third—and surprisingly—frequently traded German bonds have transaction costs that are 39–61 basis points lower than a matched sample of bonds in the US. We relate our results to a number of structural market differences that may explain our findings, including differences in market structure, transparency, and the tax and legal environment.

Credit ETFs in Mutual Funds and Corporate Bond Liquidity

AbstractWe show that high yield (HY) mutual funds own and trade ETFs to manage liquidity needs driven by fund flows, whereas investment grade (IG) funds do not. The use of ETFs by HY mutual funds to manage liquidity shifts some trading away from bonds and into ETFs, which reduces the liquidity of the underlying bonds. This substitution effect outweighs the better‐understood inclusion effect, whereby bond liquidity benefits from increased ETF ownership, such that the net effect of ETFs is to reduce HY liquidity. In IG, the substitution effect is not significant and ETFs result in increased bond liquidity.

Corporate Governance and Corporate Bond Liquidity

Corporate Governance and Corporate Bond Liquidity

Examining QE’s bang for the Buck: Does Quantitative easing reduce credit and liquidity risks and stimulate real economic activity?

This paper investigates the ECB’s Corporate Sector Purchase Programme’s (CSPP) impact on European corporate bonds’ credit and liquidity risks and real economic activity. The results show that the CSPP’s announcement (“stock effect”) lowered the credit spread of eligible corporate bonds, measured by the G-spread, by ten basis points (bps) or 9.8%. The liquidity of eligible bonds also improved as their scaled bid-ask spread decreased by 2.6 bps or 4.6%. Moreover, for every 1 billion euros of ECB corporate bond monthly purchases (“flow effect”), the scaled bid-ask spread of eligible bonds declined by 0.6 bp from June 2016 to December 2018. As for economic activity, QE’s stock effect raised corporate debt – mainly for German firms – and the stock and flow effects stimulated dividend spending, especially for German and French firms. These results indicate that QE initially improved corporate bond operations and encouraged borrowing. Moreover, the CSPP continued to boost the liquidity of corporate bonds and dividend expenditure throughout its implementation, but not investment. Therefore, QE had limited success in stimulating economic activity.

A new measure of corporate bond liquidity using survival analysis

We define liquidity for corporate bonds as the expected waiting time to reduce a risk position. Our methodology addresses the fact that many bonds are liquidated quickly despite having few trades in the recent past. Building on research from the housing market, we apply survival analysis to bond holding times. We generalize across bond properties and market conditions to arrive at a liquidity measure for all corporate bonds, independent of how often they trade and whatever transaction costs they incur.

Economic Policy Uncertainty and Corporate Bond Liquidity

Economic Policy Uncertainty and Corporate Bond Liquidity

A New Perspective on the Corporate Bond Liquidity Factor

A New Perspective on the Corporate Bond Liquidity Factor

A New Perspective on the Corporate Bond Liquidity Factor

A New Perspective on the Corporate Bond Liquidity Factor

How a New Bond Issuance Affects the Liquidity of a Bond Portfolio

Previous research describing corporate bond liquidity tends to focus on the effects on liquidity of factors such as bond age, bond credit risk, size of issuance, and regulation of trading. The article notes that many firms issue bonds when previous bonds are still outstanding and also examines how the new bond issuance affects the liquidity of the preexisting corporate bonds. One might expect the liquidity of the preexisting bonds to improve because of the greater quantity of very similar bonds outstanding or the increase in public information about the firm. However, investment bankers may aggressively market the new issuance, which may diminish the liquidity of the preexisting bonds. The article concludes that the former effect dominates and that the improvement in liquidity is more significant when newly issued bonds offer a longer maturity than preexisting bonds. <b>Key Findings</b> ▪ The liquidity of preexisting bonds tends to increase when a new bond issuance by the firm becomes available. ▪ The increase in liquidity as a result of a new bond issuance tends to be stronger when its maturity is longer relative to that of preexisting bonds. ▪ When the liquidity of preexisting bonds increases in response to a new issuance, the effect is temporary and diminishes over time.

Anatomy of a liquidity crisis: Corporate bonds in the COVID-19 crisis

We examine the microstructure of liquidity provision in the COVID-19 corporate bond liquidity crisis. During the two weeks leading up to Federal Reserve System interventions, volume shifted to liquid securities, transaction costs soared, trade-size pricing inverted, and dealers, particularly non-primary dealers, shifted from buying to selling, causing dealers’ inventories to plummet. Liquidity provisions in electronic customer-to-customer trading increased, though at prohibitively high costs. By improving dealer funding conditions and providing a liquidity backstop, the Primary Dealer Credit Facility and the Secondary Market Corporate Credit Facility (SMCCF) stabilized trading conditions. Most of the impact of SMCCF on bond liquidity seems to have materialized following its announcement. We argue that the Federal Reserve's actions reflect a new role as market maker of last resort.

Corporate Bond Liquidity during the COVID-19 Crisis

We study liquidity conditions in the corporate bond market during the COVID-19 pandemic. We document that the cost of trading immediately via risky-principal trades dramatically increased at the height of the sell-off, forcing customers to shift toward slower agency trades. Exploiting eligibility requirements, we show that the Federal Reserve’s corporate credit facilities have had a positive effect on market liquidity. A structural estimation reveals that customers’ willingness to pay for immediacy increased by about 200 bps per dollar of transaction, but quickly subsided after the Fed announced its interventions. Dealers’ marginal cost also increased substantially but did not fully subside.

Crossing boundaries beyond the investment grade: Induced trading by rating-contingent investment constraints

Institutional portfolio managers face rating-based constraints established by investment policy statements (IPS) in their delegated management which, similar to formal regulations, restrict investment in bonds below certain rating levels. We analyze how prices and liquidity of corporate bonds traded by institutional investors react to downgrades crossing these internal limits. Consistent with the existence of a non-regulatory transmission channel, downgrades through regular IPS ratings have a greater impact on the market than downgrades crossing regulatory boundaries, such as the investment-speculative frontier and the NAIC's risk-based capital system thresholds. Our results reveal the existence of other source of rating-related frictions that should be considered.

Carbon Emissions, Institutional Trading, and the Liquidity of Corporate Bonds

This paper provides a detailed investigation on how firms’ carbon emission levels affect institutional investors’ trading behaviors and liquidity conditions of corporate bonds. Our analysis is conducted with a full sample from 2007 to 2019 and causality is further established by exploiting two carbon-related shocks: The Paris Agreement and the election of U.S. President Trump. We find that both mutual funds and insurance companies are more likely to sell corporate bonds in herds if the bonds’ issuing firms have higher carbon emissions. We show that mutual fund flows negatively respond to the fund’s carbon exposures and that mutual funds are more likely to sell high-carbon bonds in the face of investor redemptions. We also find that bonds issued by high-emission firms experience worse liquidity conditions.

The Rise of Institutional Investors in Bond ETFs

We examine the effect of bond Exchange‐Traded Funds (ETFs) on corporate bond liquidity. Using Propensity Score Matching and Difference‐in‐Differences techniques, we demonstrate that inclusion in ETFs is associated with a 10% reduction in transaction costs for high yield (HY) bonds and 4% reduction for investment grade (IG) bonds. The result holds during periods of market stress and is robust to different liquidity metrics. We find evidence that HY mutual funds use ETFs to manage their liquidity needs, contributing to the steady growth of HY bond ETFs. Increased HY ETF institutional ownership channels trading away from the underlying corporate bonds to the ETF shares and decreases bond aggregate liquidity, although in the cross‐section inclusion in ETFs improves liquidity. IG investors are not substituting ETF trading for bond trading and we conclude that the gains to liquidity accruing to ETF bonds in that market are a net benefit to investors.

A risk not worth taking - The corporate bond liquidity factor

This study documents properties of market-wide corporate bond liquidity and tests if liquidity risk is priced. In market downturns, when many investors want to liquidate corporate bonds, transaction costs rise for sellers and fall for buyers. The negative relation between buyer and seller liquidity motivates a new across-measure liquidity factor that incorporates an asymmetric liquidity component. Aggregate liquidity measures are persistent, driven by common systematic components, and predict returns. Shocks to market liquidity drive return variation in the time series. However, this risk exposure is not priced as corporate bonds do not earn a positive cross-sectional liquidity risk premium.

Lighting Up the Dark: Liquidity in the German Corporate Bond Market

We study the impact of transparency on liquidity in OTC markets. We do so by providing an analysis of liquidity in a corporate bond market without trade transparency (Germany), and comparing our findings to a market with full post-trade disclosure (the U.S.). We employ a unique regulatory dataset of transactions of German financial institutions from 2008 until 2014 to find that: First, overall trading activity is much lower in the German market than in the U.S. Second, similar to the U.S., the determinants of German corporate bond liquidity are in line with search theories of OTC markets. Third, surprisingly, frequently traded German bonds have transaction costs that are 39-61 bp lower than a matched sample of bonds in the U.S. Our results support the notion that, while market liquidity is generally higher in transparent markets, a sub-set of bonds could be more liquid in more opaque markets because of investors crowding their demand into a small number of more actively traded securities.

An Empirical Model for Corporate Bond Liquidity as a Function of Bond Properties

An Empirical Model for Corporate Bond Liquidity as a Function of Bond Properties