Secondary Market Liquidity and Primary Market Pricing of Corporate Bonds †

Michael A. Goldstein; Edith S. Hotchkiss; David J. Pedersen

doi:10.3390/jrfm12020086

Secondary Market Liquidity and Primary Market Pricing of Corporate Bonds †

Michael A. Goldstein, Edith S. Hotchkiss, David J. Pedersen

Research output: Contribution to journal › Article › peer-review

17 Scopus citations

Abstract

This paper studies the link between secondary market liquidity for a corporate bond and the bond’s yield spread at issuance. Using ex-ante measures of expected liquidity at the time of issuance, based on the characteristics of the underwriting syndicate, we find an economically large impact of liquidity on yield spreads. We estimate that a 10% increase in expected liquidity implies a decrease in the yield spread at issuance of between 8% and 14%. Our results suggest that liquidity has an important effect on firms’ cost of capital, and they contribute to the literature which examines the impact of liquidity on asset prices.

Original language	English (US)
Article number	86
Journal	Journal of Risk and Financial Management
Volume	12
Issue number	2
DOIs	https://doi.org/10.3390/jrfm12020086
State	Published - Jun 2019
Externally published	Yes

All Science Journal Classification (ASJC) codes

Accounting
Business, Management and Accounting (miscellaneous)
Finance
Economics and Econometrics

Keywords

corporate bonds
liquidity
primary market pricing

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10.3390/jrfm12020086

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title = "Secondary Market Liquidity and Primary Market Pricing of Corporate Bonds †",

abstract = "This paper studies the link between secondary market liquidity for a corporate bond and the bond{\textquoteright}s yield spread at issuance. Using ex-ante measures of expected liquidity at the time of issuance, based on the characteristics of the underwriting syndicate, we find an economically large impact of liquidity on yield spreads. We estimate that a 10\% increase in expected liquidity implies a decrease in the yield spread at issuance of between 8\% and 14\%. Our results suggest that liquidity has an important effect on firms{\textquoteright} cost of capital, and they contribute to the literature which examines the impact of liquidity on asset prices.",

keywords = "corporate bonds, liquidity, primary market pricing",

author = "Goldstein, \{Michael A.\} and Hotchkiss, \{Edith S.\} and Pedersen, \{David J.\}",

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month = jun,

doi = "10.3390/jrfm12020086",

language = "English (US)",

volume = "12",

journal = "Journal of Risk and Financial Management",

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AU - Goldstein, Michael A.

AU - Hotchkiss, Edith S.

AU - Pedersen, David J.

PY - 2019/6

Y1 - 2019/6

N2 - This paper studies the link between secondary market liquidity for a corporate bond and the bond’s yield spread at issuance. Using ex-ante measures of expected liquidity at the time of issuance, based on the characteristics of the underwriting syndicate, we find an economically large impact of liquidity on yield spreads. We estimate that a 10% increase in expected liquidity implies a decrease in the yield spread at issuance of between 8% and 14%. Our results suggest that liquidity has an important effect on firms’ cost of capital, and they contribute to the literature which examines the impact of liquidity on asset prices.

AB - This paper studies the link between secondary market liquidity for a corporate bond and the bond’s yield spread at issuance. Using ex-ante measures of expected liquidity at the time of issuance, based on the characteristics of the underwriting syndicate, we find an economically large impact of liquidity on yield spreads. We estimate that a 10% increase in expected liquidity implies a decrease in the yield spread at issuance of between 8% and 14%. Our results suggest that liquidity has an important effect on firms’ cost of capital, and they contribute to the literature which examines the impact of liquidity on asset prices.

KW - corporate bonds

KW - liquidity

KW - primary market pricing

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DO - 10.3390/jrfm12020086

M3 - Article

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JF - Journal of Risk and Financial Management

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ER -

Secondary Market Liquidity and Primary Market Pricing of Corporate Bonds †

Abstract

All Science Journal Classification (ASJC) codes

Keywords

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