Corporate bonds are issued by corporations so they can generate capital. This can help them pay their bills, fund new projects, acquire equipment, or make improvements. The liquidity of a corporate bond largely governs its ability to make large-scale, low-cost asset trades without triggering a noticeable price change.൩ But why is liquidity so important in corporate bonds? That's because it has a big impact on trades on a larger scale without changing prices on a large scale.

Systematic Liquidity in the Market

Evidence presents a strong connection between systematic 澳洲幸运5官方开奖结果体彩网:liquidity risk, which is also known as common liquidity risk, and the pricing of securities in th✱e corporate bond market. Evidence also indicates that illiquidity can materially affe༺ct yield spreads, which dramatically widen during times of market volatility.

A study conducted by Friewald et al. (2012) found that liquidity accounts for up to 14% of a corporate 澳洲幸运5官方开奖结果体彩网:bond’s yield during tranquil markets, but spikes to nearly 30% during recessions and other times of financial stress. Interestingly, this phenomenon is true for all bonds, except for those rated AAA.

Broadly speaking, the liquidity of all corporate bonds fluctuates, especially during shaky economies. Various classes of corporate bonds respond differently to illiquidity shocks, largely depending on their 澳洲幸运5官方开奖结果体彩网:credit ratings. Wh🅰ile AAA bonds respond positively, higher-yielding, lower-rated corporate bonds fare poorly. In stable markets, the determinant liquidity factors tend to be idiosyncratic,🎃 based on the behaviors of each bond issuer.

The Bond’s Specific Liquidity

A study by Heck, Margaritis, and Muller identified a significant relationship between yield spreads and bond illiquidity. Their study specifically found that idiosyncratic behavior exhibited by the 澳洲幸运5官方开奖结果体彩网:liquidity of some corporate bonds may be simply due to the closed nature of the market, where investors are unlikely to invest in the bonds, either because they are unaware of their existence, or because they are forbidden from accessing them.

In many cases, individual/澳洲幸运5官方开奖结果体彩网:retail investors lack the funds necessary to invest in bonds that carry high 澳洲幸运5官方开奖结果体彩网:denominations of $100,000 or more. Even the minimum denomination of $5,000 could be too high for some beginner investors. These high figures tend to thwart their ability to incorporate such corporate bonds into their broadly 澳洲幸运5官方开奖结果体彩网:diversified portfolios.

When comparing different types of corporate bonds, the same study mentioned above also found that both shorter-term and higher-yielding bonds experience greater susceptibility to such specific of idiosyncratic illiquidity.

The Bottom Line

Numerous studies have demonstrated that illiquidity is priced in corporate bond yields. Hence, 澳洲幸运5官方开奖结果体彩网:liquidity significantly influences the corporate bond market and should be closely monitored by both private and institutional investors. 澳洲幸运5官方开奖结果体彩网:Liquidity risk is a highly complex 🍰subject matter that requires in-depth professional analysis.