Hostname: page-component-cd9895bd7-gbm5v Total loading time: 0 Render date: 2024-12-25T07:19:20.006Z Has data issue: false hasContentIssue false
  • English
  • Français

The Term Structure of Bond Liquidity

Published online by Cambridge University Press:  06 September 2018

Monika Gehde-Trapp ,
Philipp Schuster  and
Marliese Uhrig-Homburg
Get access Rights & Permissions [Opens in a new window]

Abstract

We analyze the impact of market frictions on the trading volume and liquidity premia of finite-maturity assets when investors differ in their trading needs. Our equilibrium model generates a clientele effect (frequently trading investors hold only short-term assets) and predicts i) a hump-shaped relation between trading volume and maturity, ii) lower trading volumes of older compared with younger assets, iii) an increasing liquidity term structure from ask prices, iv) a decreasing or U-shaped liquidity term structure from bid prices, and v) spillovers of liquidity from short-term to long-term maturities. Empirical tests for U.S. corporate bonds support our theoretical predictions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 5 , October 2018 , pp. 2161 - 2197
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

1

We thank conference participants at the 2013 Financial Risks International Forum on Liquidity, the 2013 Colloquium on Financial Markets, the 2013 Financial Management Association (FMA) European Conference, the 2013 meeting of the German Finance Association (DGF), and the 2015 Annual Meeting of the German Academic Association for Business Research (VHB). We also thank seminar participants at Copenhagen Business School, College of William & Mary, the University of Southern Denmark, the University of Freiburg, the University of St. Gallen, and the University of Tübingen, as well as George Angelopoulos, Patrick Augustin, Antje Berndt, Marc Crummenerl, Jens Dick-Nielsen, Frank de Jong, Peter Feldhütter, Bernd Fitzenberger, Joachim Grammig, Rainer Jankowitsch, Alexander Kempf, Sven Klingler, Holger Kraft, David Lando, Linda Larsen, Siegfried Trautmann, and Nils Unger for helpful comments and suggestions. The article greatly benefited from comments by Hendrik Bessembinder (the editor) and an anonymous referee. We also thank the Amazon Web Services (AWS) Cloud Credits for Research Program for support. An earlier version of this article was circulated under the title “A Heterogeneous Agents Equilibrium Model for the Term Structure of Bond Market Liquidity.”

References

Amihud, Y.“Illiquidity and Stock Returns: Cross-Section and Time-Series Effects.” Journal of Financial Markets, 5 (2002), 31–56.Google Scholar
Amihud, Y., and Mendelson, H.. “Asset Pricing and the Bid–Ask Spread.” Journal of Financial Economics, 17 (1986), 223–249.Google Scholar
Amihud, Y., and Mendelson, H.. “Liquidity, Maturity, and the Yields on U.S. Treasury Securities.” Journal of Finance, 46 (1991), 1411–1425.Google Scholar
Arakelyan, A., and Serrano, P.. “Liquidity in Credit Default Swap Markets.” Journal of Multinational Financial Management, 37 (2016), 139–157.Google Scholar
Beber, A.; Driessen, J.; Neuberger, A.; and Tuijp, P.. “Pricing Liquidity Risk with Heterogeneous Investment Horizons.” Working Paper, Cass Business School (2018).Google Scholar
Bessembinder, H.; Kahle, K. M.; Maxwell, W. F.; and Xu, D.. “Measuring Abnormal Bond Performance.” Review of Financial Studies, 11 (2009), 4219–4258.Google Scholar
Biswas, G.; Nikolova, S.; and Stahel, C.. “The Transaction Costs of Trading Corporate Credit.” Working Paper, U.S. Department of the Treasury (2015).Google Scholar
Brunnermeier, M. K., and Pedersen, L. H.. “Market Liquidity and Funding Liquidity.” Review of Financial Studies, 22 (2009), 2201–2238.Google Scholar
Choi, J.; Hackbarth, D.; and Zechner, J.. “Corporate Debt Maturity Profiles.” Journal of Financial Economics, forthcoming (2018).Google Scholar
Dick-Nielsen, J.“Liquidity Biases in TRACE.” Journal of Fixed Income, 19 (2009), 43–55.Google Scholar
Dick-Nielsen, J.“How to Clean Enhanced TRACE Data.” Working Paper, Copenhagen Business School (2014).Google Scholar
Dick-Nielsen, J.; Feldhütter, P.; and Lando, D.. “Corporate Bond Liquidity before and after the Onset of the Subprime Crisis.” Journal of Financial Economics, 103 (2012), 471–492.Google Scholar
Duffie, D.; Gârleanu, N.; and Pedersen, L. H.. “Over-the-Counter Markets.” Econometrica, 73 (2005), 1815–1847.Google Scholar
Duffie, D., and Singleton, K. J.. “Modeling Term Structures of Defaultable Bonds.” Review of Financial Studies, 12 (1999), 687–720.Google Scholar
Edwards, A. K.; Harris, L. E.; and Piwowar, M. S.. “Corporate Bond Market Transaction Costs and Transparency.” Journal of Finance, 62 (2007), 1421–1451.Google Scholar
Ericsson, J., and Renault, O.. “Liquidity and Credit Risk.” Journal of Finance, 61 (2006), 2219–2250.Google Scholar
Feldhütter, P.“The Same Bond at Different Prices: Identifying Search Frictions and Selling Pressure.” Review of Financial Studies, 25 (2012), 1155–1206.Google Scholar
Fontaine, J.-S., and Garcia, R.. “Bond Liquidity Premia.” Review of Financial Studies, 25 (2012), 1207–1254.Google Scholar
Gale, D. The Theory of Linear Economic Models. Chicago, IL: University of Chicago Press (1960).Google Scholar
Goyenko, R.; Subrahmanyam, A.; and Ukhov, A.. “The Term Structure of Bond Market Liquidity and Its Implications for Expected Bond Returns.” Journal of Financial and Quantitative Analysis, 46 (2011), 111–139.Google Scholar
Guiso, L.; Sapienza, P.; and Zingales, L.. “Time Varying Risk Aversion.” Journal of Financial Economics, 128 (2018), 403–421.Google Scholar
Gürkaynak, R. S.; Sack, B.; and Wright, J. H.. “The U.S. Treasury Yield Curve: 1961 to the Present.” Journal of Monetary Economics, 8 (2007), 2291–2304.Google Scholar
He, Z., and Milbradt, K.. “Endogenous Liquidity and Defaultable Bonds.” Econometrica, 82 (2014), 1443–1508.Google Scholar
He, Z., and Xiong, W.. “Rollover Risk and Credit Risk.” Journal of Finance, 67 (2012), 391–429.Google Scholar
Hotchkiss, E. S., and Jostova, G.. “Determinants of Corporate Bond Trading: A Comprehensive Analysis.” Quarterly Journal of Finance, 7 (2017), 1750003.Google Scholar
Huang, J.“Dynamic Liquidity Preferences of Mutual Funds.” Working Paper, University of Illinois at Urbana–Champaign (2015).Google Scholar
Huang, J.-Z., and Huang, M.. “How Much of the Corporate-Treasury Yield Spread Is Due to Credit Risk?” Review of Asset Pricing Studies, 2 (2012), 153–202.Google Scholar
Huang, J.-Z.; Sun, Z.; Yao, T.; and Yu, T.. “Liquidity Premium in the Eye of the Beholder: An Analysis of the Clientele Effect in the Corporate Bond Market.” Working Paper, Pennsylvania State University (2014).Google Scholar
Kempf, A.; Korn, O.; and Uhrig-Homburg, M.. “The Term Structure of Illiquidity Premia.” Journal of Banking and Finance, 36 (2012), 1381–1391.Google Scholar
Koziol, C., and Sauerbier, P.. “Valuation of Bond Illiquidity: An Option-Theoretical Approach.” Journal of Fixed Income, 16 (2007), 81–107.Google Scholar
Longstaff, F. A.“The Flight-to-Liquidity Premium in U.S. Treasury Bond Prices.” Journal of Business, 77 (2004), 511–526.Google Scholar
Longstaff, F. A.; Mithal, S.; and Neis, E.. “Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit Default Swap Market.” Journal of Finance, 60 (2005), 2213–2253.Google Scholar
Merton, R.“On the Pricing of Corporate Debt: The Risk Structure of Interest Rates.” Journal of Finance, 29 (1974), 449–470.Google Scholar
Newey, W. K., and West, K. D.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.Google Scholar
Norden, L.; Roosenboom, P.; and Wang, T.. “The Effects of Corporate Bond Granularity.” Journal of Banking and Finance, 63 (2016), 25–34.Google Scholar
Petersen, M. A.“Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches.” Review of Financial Studies, 22 (2009), 435–480.Google Scholar
Schestag, R.; Schuster, P.; and Uhrig-Homburg, M.. “Measuring Liquidity in Bond Markets.” Review of Financial Studies, 29 (2016), 1170–1219.Google Scholar
Vayanos, D., and Wang, T.. “Search and Endogenous Concentration of Liquidity in Asset Markets.” Journal of Economic Theory, 136 (2007), 66–104.Google Scholar
Warga, A.“Bond Returns, Liquidity, and Missing Data.” Journal of Financial and Quantitative Analysis, 27 (1992), 605–617.Google Scholar
White, H.“Maximum Likelihood Estimation of Misspecified Models.” Econometrica, 50 (1982), 1–25.Google Scholar
Supplementary material: File

Gehde-Trapp et al. supplementary material

Gehde-Trapp et al. supplementary material 1

Download Gehde-Trapp et al. supplementary material(File)
File 264.8 KB