Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/118649
Authors: 
Black, Jeffrey R.
Stock, Duane
Yadav, Pradeep K.
Year of Publication: 
2015
Series/Report no.: 
CFR Working Paper 15-10
Abstract: 
Seminal market microstructure literature identifies at least three important dimensions of liquidity: trading costs, depth, and resiliency. We investigate the relevance of each of these three dimensions of liquidity - separately and in conjunction - for the pricing of corporate bonds. Unlike previous studies, our sample allows us to cleanly separate the default and non-default components of yield spreads. We find that each of the above three dimensions of liquidity impact non-default spreads, with trading costs and resiliency being more important than depth. We also find that both bond-specific and market-wide dimensions of liquidity are priced in non-default spreads. Finally, we find that, even though these three dimensions of liquidity account for virtually the entire non-default spread, there does exist in some periods a small residual non-default yield spread that is consistent with an additional "flight-to-extreme-liquidity" premium reflecting investor preference for assets that enable quickest possible disengagement from the market when necessary.
Document Type: 
Working Paper

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