Market Liquidity Risk - An Overview

This paper explores the role of liquidity risk in the pricing of corporate bonds. We show that corporate bond returns have significant exposures to fluctuations in treasury bond liquidity and equity market liquidity. Further, this liquidity risk is a priced factor for the expected returns on corporate bonds, and the associated liquidity risk premia help to explain the credit spread puzzle. In terms of expected returns, the total estimated liquidity risk premium is around 0.6% per annum for US long-maturity investment grade bonds. For speculative grade bonds, which have higher exposures to the liquidity factors, the liquidity risk premium is around 1.5% per annum. We find very similar evidence for the liquidity risk exposure of corporate bonds for a sample of European corporate bond prices.

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Market Liquidity and Momentum Profits : Evidence from the Korean Stock Market

Journal of Derivatives and Quantitative Studies ◽

10.1108/jdqs-04-2018-b0004 ◽

2018 ◽

Vol 26 (4) ◽

pp. 497-524

Author(s):

Changha Kim ◽

Changjun Lee

Keyword(s):

Stock Market ◽

Liquidity Risk ◽

Market Liquidity ◽

Momentum Effect ◽

Momentum Strategy ◽

Full Sample ◽

Momentum Profits ◽

Significant Difference ◽

Korean Stock Market ◽

The Difference

Previous literature in the Korean stock market has shown that the momentum effect is not observed during pre-2000 period while it is observed during post-2000 period. Given that market illiquidity has substantially decreased during post-2000 period, we examine whether the level of market illiquidity affect the momentum profits. The central findings are summarized as follows. First, our full-sample analysis shows that market liquidity is positively associated with momentum profits, meaning that the observed momentum effect during post-2000 period is related to the decrease in market illiquidity. Second, during pre-2000 period, when the market illiquidity is very high, the illiquidity of past losers is extremely high compared to that of past winners. However, there is no significant difference in illiquidity between winners and losers during post-2000 period. Third, based on this result, we conjecture that the momentum effect is related to the different compensation for liquidity risk between past losers and winners, and test whether this is indeed the case. We find significant momentum profits over the whole period when we consider the compensation for the liquidity risk of past losers and winners. In addition, during pre-2000 period, the return on momentum strategy that controls the liquidity risk is substantially higher than the actually observed momentum profits. In sum, our study suggests that the difference in compensation for liquidity risk between past losers and winners is very important in understanding the momentum effect in the Korean stock market.

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The Effect of Market Liquidity Risk on The Credit Ratings of Corporate Bonds

Accounting Information Review ◽

10.29189/kaiaair.37.3.08 ◽

2019 ◽

Vol 37 (3) ◽

pp. 183-205

Author(s):

Hyung Tae An ◽

Seong Mi Bae ◽

Mun Kee Cho

Keyword(s):

Credit Ratings ◽

Corporate Bonds ◽

Liquidity Risk ◽

Market Liquidity

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Managing market liquidity risk in central counterparties

The Journal of Financial Market Infrastructures ◽

10.21314/jfmi.2017.077 ◽

2017 ◽

Vol 5 (4) ◽

pp. 105-125 ◽

Cited By ~ 1

Author(s):

Evangelos Benos ◽

Pedro Gurrola-Perez ◽

Michael Wood

Keyword(s):

Liquidity Risk ◽

Market Liquidity ◽

Central Counterparties

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Spread determinants in corporate bond pricing: The effect of market and liquidity risks

Panoeconomicus ◽

10.2298/pan171024002o ◽

2020 ◽

pp. 2-2

Author(s):

Menevşe Özdemir-Dilidüzgün ◽

Ayşe Altıok-Yılmaz ◽

Elif Akben-Selçuk

Keyword(s):

Risk Premium ◽

Emerging Market ◽

Corporate Bonds ◽

Liquidity Risk ◽

Market Liquidity ◽

Corporate Bond ◽

Bond Pricing ◽

High Yield ◽

Bond Liquidity ◽

Investment Grade

This paper investigates the effect of market and liquidity risks on corporate bond pricing in Turkey, an emerging market, and in Europe. Results show that corporate bond returns have exposure to liquidity factors and not to market factors in both settings. Corporate bonds issued in Turkey have significant exposure to fluctuations in benchmark treasury bond liquidity and corporate bond market liquidity; while corporate bonds issued in Eurozone have exposure to equity market liquidity and are sensitive to fluctuations in a 10-year generic government bond liquidity. The total estimated liquidity risk premium is 0.7% per annum for Turkish ?A? and above graded corporate bonds, and 1.08% for the last investment grade level (BBB-) long term bonds. For Eurozone, the total liquidity risk premium is 0.27% for investment grade 5-10 year term bonds, 1.05% for high-yield 1-5 year term bonds and 1.02% for high-yield 5-10 year term category.

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