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Size-adapted bond liquidity measures and their asset pricing implications

Author

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  • Reichenbacher, Michael
  • Schuster, Philipp
Abstract
We develop new liquidity measures for bond markets. Existing measures suffer from the combination of two effects. First, transaction costs in OTC markets strongly depend on trade size. Second, many bonds trade only scarcely with strongly differing trading volumes. Therefore, changes in average transaction costs often indicate changing trade sizes rather than changing liquidity. We combine full-sample information for the size-cost relation with individual transaction data to eliminate such measurement problems. We find that size-adapted measures make a difference when analyzing liquidity dynamics in the U.S. corporate bond market, liquidity differences between bonds, and the asset pricing implications of liquidity.

Suggested Citation

  • Reichenbacher, Michael & Schuster, Philipp, 2022. "Size-adapted bond liquidity measures and their asset pricing implications," Journal of Financial Economics, Elsevier, vol. 146(2), pages 425-443.
    • Handle: RePEc:eee:jfinec:v:146:y:2022:i:2:p:425-443
    DOI: 10.1016/j.jfineco.2022.07.010
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    2. Said, Bahrawar & Raza, Muhammad Wajid & Elshahat, Ahmed, 2024. "Does market microstructure affect time-varying efficiency? Evidence from emerging markets," Research in International Business and Finance, Elsevier, vol. 70(PA).

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    More about this item

    Keywords

    Bond liquidity; Transaction costs; Bid-ask spread; Trade size; Asset pricing; Rating downgrades;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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