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Flight from Liquidity and Corporate Bond Yields

Ebrahim Nejad, A ; Sharif University of Technology | 2023

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  1. Type of Document: Article
  2. DOI: 10.1111/fmii.12182
  3. Publisher: John Wiley and Sons Inc , 2023
  4. Abstract:
  5. 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 long-lasting pricing impact. We provide suggestive evidence that the liquidity clientele effect derives these results. Our findings suggest that investment exposure to liquid bonds entails a unique risk arising during periods of distress. © 2023 New York University Salomon Center
  6. Keywords:
  7. Bond Yield ; Corporate Bonds ; Liquidity
  8. Source: Financial Markets, Institutions and Instruments ; Volume 32, Issue 5 , 2023 , Pages 255-283 ; 09638008 (ISSN)
  9. URL: https://onlinelibrary.wiley.com/doi/abs/10.1111/fmii.12182