Flight from Liquidity: Evidence from US Corporate Bond Market

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Molanaei, Aryan | 2022

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Type of Document: M.Sc. Thesis
Language: Farsi
Document No: 55469 (44)
University: Sharif University of Technology
Department: Management and Economics
Advisor(s): Ebrahimnezhad, Ali
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.
Keywords:
Mutual Fund ; Liquidity Shock ; Liquidity ; Corporate Bond ; Yield

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