The Same Bond at Different Prices: Identifying Search Frictions and Selling Pressures

Feldhütter, Peter

doi:10.2139/ssrn.1413672

Cited by 49 publications

(52 citation statements)

References 61 publications

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“…The second result, that the bid-ask spread is increasing in time-to-maturity, is similar to Feldhütter (2012), with the difference that, in our model, maturity is deterministic instead of an intensity-based random variable. A shorter time-tomaturity delivers the principal back to L investors sooner, enhancing L-type's outside option in bargaining.…”

Section: Which Always Holds For Par Bonds (Due To Potential Defaultsupporting

confidence: 67%

“…Although we exogenously link this firm-wide liquidity event to default, the timing of default is endogenously determined in our model. As discussed later, this gives us a forward link from pre-to post-default liquidity, which contrasts with Feldhütter (2012), who studied an exogenous firm-wide liquidity event.…”

Section: Post-default Secondary Market and Type-dependent Recovery Famentioning

confidence: 92%

“…Second, our paper links secondary market liquidity to a firm's endogenous default. A firm's default can be viewed as a firmwide liquidity event that endogenizes the exogenous aggregate liquidity shock in Feldhütter (2012). Finally, our paper demonstrates that, via the rollover channel, search-based secondary market liquidity can have a significant impact on firms' behavior on the real side.…”

mentioning

confidence: 84%

“…This is following Feldhütter (2012), which, to the best of our knowledge, is the only paper that provides an estimation of β based on a different structural model involving search.…”

Section: Parameters For Search Frictionsmentioning

confidence: 99%

“…We borrow from the search-based asset-pricing literature as represented by DGP05, Duffie, Gârleanu, and Pedersen (2007), Weill (2007), Lagos and Rocheteau (2007), Lagos and Rocheteau (2009), Biais andWeill (2009), Feldhütter (2012), among others. To our knowledge, this literature with a concentration on OTC markets has thus far focused on the determinants of contact intensities and behavior of intermediaries, while eschewing time-varying asset fundamentals; for instance, Feldhütter (2012) studied the liquidity of corporate bonds but modeled default as an exogenous Poisson event. 6 We make three contributions to this literature.…”

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confidence: 99%

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Endogenous Liquidity and Defaultable Bonds

2014

Econometrica

173

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This paper studies the interaction between default and liquidity for corporate bonds that are traded in an over-the-counter secondary market with search frictions. Bargaining with dealers determines a bond's endogenous liquidity, which depends on both the firm fundamental and the time-to-maturity of the bond. Corporate default decisions interact with the endogenous secondary market liquidity via the rollover channel. A default-liquidity loop arises: Assuming a relative illiquid secondary bond market in default, earlier endogenous default worsens a bond's secondary market liquidity, which amplifies equity holders' rollover losses, which in turn leads to earlier endogenous default. Besides characterizing in closed form the full interdependence between liquidity and default for credit spreads, our calibrated model can jointly match empirically observed credit spreads and liquidity measures of bonds across different rating classes.KEYWORDS: Positive feedback, liquidity, over-the-counter market, secondary bond market, structural models for credit risk, transaction cost for corporate bonds, bid-ask spread.

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Section: Which Always Holds For Par Bonds (Due To Potential Defaultsupporting

confidence: 67%

Section: Post-default Secondary Market and Type-dependent Recovery Famentioning

confidence: 92%

mentioning

confidence: 84%

“…This is following Feldhütter (2012), which, to the best of our knowledge, is the only paper that provides an estimation of β based on a different structural model involving search.…”

Section: Parameters For Search Frictionsmentioning

confidence: 99%

mentioning

confidence: 99%

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Endogenous Liquidity and Defaultable Bonds

2014

Econometrica

173

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The term structure of illiquidity premia

Kempf

Korn

Uhrig‐Homburg

2012

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 AbstractThis paper investigates the dynamics of the term structure of bond market illiquidity premia using data on German bond market segments which differ only with respect to their liquidity. We analyze the interaction between different parts of the term structure and identify economic factors that drive the illiquidity premia. We obtain three main results: (i) The term structure of illiquidity premia is U-shaped on average but its shape varies over time.(ii) There is a strict separation between the short end and the long end of the term structure of illiquidity premia, i.e. we find no evidence for spill-over effects across different maturities. Different economic factors drive different parts of the term structure. The short end is mainly driven by asset market volatilities which suggests a flight-to-liquidity effect. In contrast, the long end depends on long-term business cycle economic prospects. This suggests that different parts of the term structure are determined by different investor clienteles with different liquidity needs. (iii) There is a smooth transition from short-term to long-term illiquidity premia. The longer the time to maturity of a bond, the less important market volatilities are and the more important long-term economic prospects become.JEL Classification: G12, G13

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The Liquidity Effects of Official Bond Market Intervention

Pooter¹,

Martin²,

Pruitt³

2018

J. Financ. Quant. Anal.

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To “ensure depth and liquidity,” the European Central Bank intervened in sovereign debt markets through its Securities Markets Programme (SMP), providing a unique opportunity to estimate the effects of large-scale asset purchases on sovereign bond liquidity premia. From reduced-form estimates, we find robust, economically significant impact and lasting reductions in sovereign bonds’ liquidity premia in response to official purchases. We develop a search-based asset-pricing model to understand our empirical results. The theory implies that bond liquidity premia fall in response to both official purchases and rising sovereign default probabilities, as seen in the data.

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The Same Bond at Different Prices: Identifying Search Frictions and Selling Pressures

Cited by 49 publications

References 61 publications

Endogenous Liquidity and Defaultable Bonds

Endogenous Liquidity and Defaultable Bonds

The term structure of illiquidity premia

The Liquidity Effects of Official Bond Market Intervention

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