Liquidity of corporate bonds and credit spread

Wang, Haiyang

doi:10.1016/j.frl.2023.103941

Cited by 2 publications

(3 citation statements)

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“…It is quite evident from the data that corporate bonds are illiquid as compared to government securities (G-Secs) and state development loans (SDLs). Credit risk is higher in illiquid bonds (Chakravarty and Sarkar 2003;Longstaff et al 2004) and hence more compensation is required to exchange them for bonds with high liquidity (Wang 2023). This paper proposes a solution to the problem of illiquidity with an approach to estimate the exchange value of an illiquid bond with a liquid bond.…”

Section: Discussionmentioning

confidence: 99%

“…The differences in liquidity are evidenced by the differences in the bid-ask spread, the brokerage fees, and the standard size of a transaction (Amihud and Mendelson 1991). In a recent study, Wang (2023) examined the impact of corporate bond liquidity on credit spreads for listed companies in China. The results showed that better liquidity reduces investor risk compensation and credit spreads.…”

Section: Literature Reviewmentioning

confidence: 99%

“…It is evident, however, that the secondary corporate bond market is in serious distress, as 0% liquidity exists on 69% of trading days and 0-10% liquidity exists on 25% of trading days for corporate bonds with the highest rating of 'AAA'. Despite the government's efforts to promote liquidity through credit enhancement frameworks, dealer and issuer incentives, etc., there is a limited secondary market for bonds, particularly corporate bonds (Chakravarty and Sarkar 1999;Chang et al 2021;Baviera et al 2021;Wang 2023). Due to the secondary market's illiquidity, primary market participants are hesitant to subscribe, which ultimately results in illiquidity premiums.…”

Section: Proposed Solution To the Problem Of An Illiquid Bondmentioning

confidence: 99%

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Proposing Credit- and Sensitivity-Risk-Based Methodology to Address Corporate Bond Illiquidity Problem

Arora,

Mehra

2023

JRFM

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The current study explores the problem of illiquidity in the corporate bond market globally and proposes a solution to enhance liquidity by studying various dimensions of liquidity. Purpose: The purpose of this paper is to propose a solution to the global issue of illiquidity in the corporate bond market. The problem has been identified by many researchers and this paper attempts to find a viable solution in the “fungibility route” as an alternative to the “liquidity route”. Design/Methodology: An analysis of a sample size of 234,772 trade data of corporate bonds and a sample size of 2,00,607 trade data of G-securities is performed to identify the problem. Findings/Solution proposed: A mathematical model based on the credit risk differential and sensitivity differential is proposed to find out the fair value at which an illiquid bond can be exchanged with a liquid bond. To arrive at the fair value of the illiquid bond, we have calculated the risk-adjusted yield (RAY) using the modified duration and a credit risk differential. Originality: This research is a pioneering effort in addressing the worldwide issue of corporate bond illiquidity by proposing a novel solution. The proposed strategy aims to improve the liquidity of the bond indirectly, by utilizing the fungibility route.

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Section: Discussionmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%