A Global Liquidity Factor for Fixed Income Pricing

36 Pages Posted: 18 Dec 2008 Last revised: 12 Aug 2009

Date Written: June 13, 2009

Abstract

Liquidity premiums have been widely documented for equity and bond markets. However, there is a lack of easily implementable measures of systematic liquidity for bond markets, which are typically far less liquid. We show that a simple liquidity factor - based on the difference between corporate bond spreads and credit default swaps - is signifcantly associated with returns in a wide range of fixed income markets. The corresponding liquidity premium is time-varying but persistent and drives a fair amount of serial and cross-sectional variation in fixed income prices. Moreover, liquidity exposure varies predictably with maturity and credit rating suggesting a ight-to-quality phenomenon.

Keywords: Liquidity, Bond Market, Asset pricing, Factor Models

JEL Classification: G12, G15, G21

Suggested Citation

Gintschel, Andreas and Wiehenkamp, Christian, A Global Liquidity Factor for Fixed Income Pricing (June 13, 2009). Available at SSRN: https://ssrn.com/abstract=1316820 or http://dx.doi.org/10.2139/ssrn.1316820

Andreas Gintschel

JPMorgan ( email )

Junghofstrasse 14
Frankfurt, 60311
Germany
+49 69 7124 2195 (Phone)

Christian Wiehenkamp (Contact Author)

affiliation not provided to SSRN

Do you want regular updates from SSRN on Twitter?

Paper statistics

Downloads
431
Abstract Views
2,516
rank
93,253
PlumX Metrics