How much can illiquidity affect corporate debt yield spread?

Research output: Contribution to journalArticlepeer-review

9 Scopus citations

Abstract

We present a structural method for measuring the upper bound for the illiquidity risk of liabilities issued by a levered firm. The method calculates the upper bound of illiquidity spread of a corporate bond given its duration and the issuing firm's asset risk and leverage ratio. Consistent with the empirical literature the illiquidity spread is positively related to the issuing firm's asset risk and leverage ratio and the illiquidity component increases with a bond's credit quality. The term structure of illiquidity spread has a humped shape, where its maximum level depends on the firm's leverage ratio. Finally, we demonstrate how the method's implied restricted trading period can be used as a measure for illiquidity in the bonds’ market.

Original languageEnglish
Pages (from-to)58-69
Number of pages12
JournalJournal of Financial Stability
Volume25
DOIs
StatePublished - 1 Aug 2016

Bibliographical note

Publisher Copyright:
© 2016 Elsevier B.V.

Keywords

  • Corporate bonds
  • Financial crisis
  • Illiquidity
  • Illiquidity spread
  • Yield spread

Fingerprint

Dive into the research topics of 'How much can illiquidity affect corporate debt yield spread?'. Together they form a unique fingerprint.

Cite this