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molanaei--aryan
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Flight from Liquidity: Evidence from US Corporate Bond Market
, M.Sc. Thesis Sharif University of Technology ; Ebrahimnezhad, Ali (Supervisor)
Abstract
In distress periods, liquidity constrained investors sell liquid corporate bonds and hold onto illiquid ones, a phenomenon which we refer to as flight from liquidity. Performing within issuer-time analysis to properly control for (changes in) credit risk, we find that flight from liquidity results in a decline in the liquidity premium and in a temporary underperformance of liquid corporate bonds during distress periods. Our findings suggest that holding credit risk fixed, liquid bonds do not provide safety during the time it is most needed.
Flight from Liquidity and Corporate Bond Yields
, Article Financial Markets, Institutions and Instruments ; Volume 32, Issue 5 , 2023 , Pages 255-283 ; 09638008 (ISSN) ; Hoseinzade, S ; Molanaei, A ; Sharif University of Technology
John Wiley and Sons Inc
2023
Abstract
This paper documents that in distress periods, liquidity constrained investors sell liquid corporate bonds and hold onto illiquid ones, a phenomenon which we refer to as flight from liquidity. Performing within issuer-time analysis to properly control for credit risk, we find that flight from liquidity results in a decline in the liquidity premium. In other words, liquid bonds that are significantly more expensive in normal market conditions, lose more value in distress periods and trade at a closer, and sometimes at an indistinguishable, yield spread to their illiquid peers from the same issuer. We also find that these shocks to the liquidity premium are short-lived and do not have a...