Corporate Bond Liquidity Before and After the Onset of the Subprime Crisis

Dick‐Nielsen, Jens; Feldhütter, Peter; Lando, David

doi:10.2139/ssrn.1364635

Cited by 190 publications

(275 citation statements)

References 59 publications

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“…Economically, this positive correlation reflects the pricing effect of the well-known flight-to-quality behavior of investors: bonds become less liquid when their credit quality deteriorates (e.g., Dick-Nielsen et al, 2012;Friewald et al, 2012;and Acharya et al, 2013) as investors shift their portfolios towards risk-free bonds or cash.…”

Section: Risk Factor Correlation and Investor Sentimentmentioning

confidence: 99%

Investor sentiment, flight-to-quality, and corporate bond comovement

Bethke

Gehde-Trapp

Kempf

2017

Journal of Banking & Finance

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractWe examine the dynamics of bond correlation using a broad sample of US corporate bonds, and document that bond correlation varies heavily over time. We attribute this variation in bond correlation to variation in risk factor correlation reflecting time-varying flight-to-quality behavior of investors. We show that risk factor correlation increases when investor sentiment decreases, i.e., corporate bond investors exhibit stronger flight-to-quality when their sentiment is low. Thus, low investor sentiment leads to flightto-quality behavior and, ultimately, high bond correlation.JEL classification: G11; G12

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Section: Risk Factor Correlation and Investor Sentimentmentioning

confidence: 99%

Investor sentiment, flight-to-quality, and corporate bond comovement

Bethke

Gehde-Trapp

Kempf

2017

Journal of Banking & Finance

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“…The model presented in this paper generates bubbles, crashes and excess volatility because imperfect knowledge and adaptive learning lead to significant swings in the liquidity premium that arise in over-thecounter markets. Dick-Nielsen, Feldhutter, and Lando (2012) find that excess volatility in estimated liquidity premia for investment grade corporate debt, and that this estimated premium grew substantially after the onset of the financial crisis. Their results can be interpreted in the context of the present model as a decline in the supply of safe assets.…”

Section: Introductionmentioning

confidence: 90%

Imperfect knowledge, liquidity and bubbles

Branch

2016

Journal of Economic Dynamics and Control

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This paper demonstrates that insufficient liquidity, in the form of a shortage of safe assets that are useful as collateral in facilitating exchange, can lead to substantial movements in asset prices. There is a single asset that yields a positive payoff stream and can be traded in a centralized market. The asset can also be used to facilitate exchange in decentralized, or over-the-counter, trade and if the asset is in sufficiently short supply the fundamental asset price includes a liquidity premium. Traders, though, have imperfect information about the future price at which the asset will trade and so they behave like a Bayesian who estimates an econometric forecasting model for the asset price that is updated in real-time via discounted least-squares. The paper has three primary results: first, a permanent decrease in the supply of safe assets can lead to a substantial over-shooting of the asset price from its fundamental value; second, an increase in collateral requirements can lead to a substantial overshooting of asset prices; third, when asset prices include a liquidity premium there can be recurrent bubbles and crashes that arise as endogenous responses to economic shocks.

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“…Among the most recent contributions, based on the principal component analysis, see Nielsen et al (2012), who obtain an efficient proxy of liquidity by using four indicators: Amihud (2002), implicit trading costs, turnover and zero-trade days proxies. In this work the choice of liquidity indicators has also been forced by data limitations.…”

Section: Liquidity Of the Italian Dual-listed Corporate Bondsmentioning

confidence: 99%

The Liquidity of Dual-Listed Corporate Bonds. Empirical Evidence from Italian Markets

et al. 2014

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We compute some indicators (zero-trade, turnover ratio, Amihud price impact, and Roll bid-ask spread) to examine the liquidity conditions of corporate bonds traded on the main Italian retail bond markets from January 2010 to June 2013. In order to compare market liquidity for identical securities, our analysis focuses on fragmented bonds, i.e. bonds traded concurrently on two different venues: either DomesticMOT and EuroTLX, or ExtraMOT and EuroTLX. As for bonds traded on DomesticMOT and EuroTLX, the Amihud and the Roll statistics suggest EuroTLX being more liquid. Moreover, irrespective of the trading venue, on average bank bonds are less liquid than bonds issued by non-financial companies, especially from 2011 due to the impact of the sovereign debt crisis. With regard to bonds traded across ExtraMOT and EuroTLX, the latter is characterized by better liquidity conditions, with bank bonds being more liquid than non-financial ones. Furthermore, we find evidence of better liquidity figures for Italian bonds (nationality), structured bonds (complexity), and securities with greater minimum trading size (MTS). We also find that bonds' features (issuers' nationality and industry; bonds' residual maturity, complexity, rating, etc…) affect liquidity differently depending upon the trading venue, thus supporting the view that market microstructure may play a relevant role. Finally, we investigate the effect of fragmentation by comparing the liquidity of dual-listed bank bonds fragmented across DomesticMOT and EuroTLX with otherwise similar bank bonds traded exclusively on DomesticMOT. Italian fragmented bank bonds turn out to be slightly more liquid than similar Italian bonds traded exclusively on DomesticMOT; whereas, the opposite holds for foreign bank bonds. However, overall there is not a clear-cut evidence on the effect of fragmentation on bond liquidity, probably because it is intertwined with bonds' attributes, such as the issue size (in our sample, higher for the Italian bank bonds).JEL Classification: G01, G10, G12, G18

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Corporate Bond Liquidity Before and After the Onset of the Subprime Crisis

Cited by 190 publications

References 59 publications

Investor sentiment, flight-to-quality, and corporate bond comovement

Investor sentiment, flight-to-quality, and corporate bond comovement

Imperfect knowledge, liquidity and bubbles

The Liquidity of Dual-Listed Corporate Bonds. Empirical Evidence from Italian Markets

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