An Asset Pricing Approach to Liquidity Effects in Corporate Bond Markets

Bongaerts, Dion; Jong, Frank de; Driessen, Joost

doi:10.1093/rfs/hhx005

Cited by 107 publications

(23 citation statements)

References 59 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…We therefore conclude that the informational content of our measures of OTC frictions for yield spread changes is unrelated to liquidity risk in the equity market. The incremental adjusted R 2 in the time‐series regression is nonnegligible, confirming the finding of Bongaerts, de Jong, and Driessen () that equity liquidity risk affects bond prices systematically.…”

Section: Systematic Otc Frictions and Yield Spread Changessupporting

confidence: 82%

“…Further, Chen, Lesmond, and Wei (2007) study the role of liquidity in the form of zero-return days, whereas Bao, Pan, andWang (2011), Dick-Nielsen, Feldhütter, andLando (2012), and Friewald, Jankowitsch, and Subrahmanyam (2012) investigate various proxies for liquidity, such as the measures of Roll (1984) and Amihud (2002). Lin, Wang, andWu (2011), De Jong andDriessen (2012), Acharya, Amihud, and Bharath (2013), and Bongaerts, de Jong, and Driessen (2017) examine bond returns instead of yield spread changes, showing that liquidity or liquidity risk matters in pricing bonds.…”

mentioning

confidence: 99%

See 1 more Smart Citation

Over‐the‐Counter Market Frictions and Yield Spread Changes

Friewald¹,

Nagler²

2019

The Journal of Finance

View full text Add to dashboard Cite

We empirically study whether systematic over‐the‐counter (OTC) market frictions drive the large unexplained common factor in yield spread changes. Using transaction data on U.S. corporate bonds, we find that marketwide inventory, search, and bargaining frictions explain 23.4% of the variation in the common component. Systematic OTC frictions thus substantially improve the explanatory power of yield spread changes and account for one‐third of their total explained variation. Search and bargaining frictions combined explain more in the common dynamics of yield spread changes than inventory frictions. Our findings support the implications of leading theories of intermediation frictions in OTC markets.

show abstract

Section: Systematic Otc Frictions and Yield Spread Changessupporting

confidence: 82%

mentioning

confidence: 99%

Over‐the‐Counter Market Frictions and Yield Spread Changes

Friewald¹,

Nagler²

2019

The Journal of Finance

View full text Add to dashboard Cite

show abstract

“…This theoretical contrast between the conditional and the unconditional pictures should provide guidance for empirical researchers studying illiquid markets and trying to decide which of the two terms is more important. Bongaerts, de Jong, and Driessen (, p. 1259), for instance, study the effect of liquidity on corporate bond expected returns and “find a strong effect of expected liquidity and equity market liquidity risk on expected corporate bond returns, while there is little evidence that corporate bond liquidity risk exposures explain expected corporate bond returns, even during the recent financial crisis.” Our model shows that, here especially, empirical conclusions could vary markedly depending on conditioning.…”

Section: Applicationsmentioning

confidence: 99%

The Dynamic Properties of Financial‐Market Equilibrium with Trading Fees

Buss¹,

Dumas

2019

The Journal of Finance

View full text Add to dashboard Cite

We incorporate trading fees into a dynamic, multiagent general-equilibrium model in which traders optimally decide when to trade. For that purpose, we propose an innovative algorithm that synchronizes the traders. Securities prices are not so much affected by the payment of the fees itself, but rather by the trade-off that the traders face between smoothing consumption and smoothing holdings. In calibrated examples, the interest rate and welfare decline with trading fees, while risk premia and volatilities increase. Liquidity risk and expected liquidity are priced, leading to deviations from the consumption-CAPM. With trading fees, capital is slow-moving, generating slow price reversal.

show abstract

“…The objective of this paper is to examine the role of different market participants in the process of price discovery in the Indonesian government bond market, which has a specific characteristic that its liquidity is relatively low. This paper has an important contribution because previous research focuses on the developed market, which is a liquid market (Bongaerts, De Jong, & Driessen, 2017). This paper also identifies the interaction pattern between investor groups and their impact on yield volatility.…”

Section: Buddi Wibowomentioning

confidence: 99%

Private information, yield volatility, and interaction between groups of investors: Case of Indonesia government bond market

Wibowo

2019

Jurnal Keuangan Dan Perbankan

View full text Add to dashboard Cite

Relation of private information and yield volatility in the relatively low liquid market such as Indonesia government bond market is one of the recent important research topics in finance. Because private information accumulation mastery affects interaction pattern between dealers and their customers, it is urgent to identify this price mechanism in government bond market, especially in a low liquid market which small trading volume may create serious yield volatility. If there is a substantial disagreement on bond fair value because of distinct private information quality between each those groups of investors success to accumulate it, bond price will fluctuate wildly. This paper study the dealer and customer order flow interaction to identify which side that have a greater impact on yield volatility. The results show that from the two layers of order flow, disagreement between dealers and customers are slightly in a short-term and medium-term bond, so their volatility is relatively low. But for a long-term bond, disagreement is substantial and creates high yield volatility. Different trading platform and strategy between dealer and customer play an important role in creating high yield fluctuations. How to Cite: Wibowo, B. (2019). Private information, yield volatility, and interaction between groups of investors: Case of Indonesia government bond market.

show abstract

An Asset Pricing Approach to Liquidity Effects in Corporate Bond Markets

Cited by 107 publications

References 59 publications

Over‐the‐Counter Market Frictions and Yield Spread Changes

Over‐the‐Counter Market Frictions and Yield Spread Changes

The Dynamic Properties of Financial‐Market Equilibrium with Trading Fees

Private information, yield volatility, and interaction between groups of investors: Case of Indonesia government bond market

Contact Info

Product

Resources

About