Schuster, Philipp Trapp, Monika Uhrig-Homburg, Marliese
Year of Publication:
CFR Working Paper 13-05 [rev.2]
We analyze the impact of market frictions on trading volume and liquidity premia of finite maturity assets when investors differ in their trading needs. Our equilibrium model generates a clientele effect (frequently trading investors only hold short-term assets) and predicts i) a hump-shaped relation between trading volume and maturity, ii) lower trading volumes of older compared to younger assets, iii) an increasing liquidity term structure from ask prices, iv) a decreasing or U-shaped liquidity term structure from bid prices, and v) spill-overs of liquidity from short-term to long-term maturities. Empirical tests for U.S. corporate bonds support our theoretical predictions.
bond liquidity term structure of liquidity premia heterogeneous agents aging effect trading volume equilibrium