Corporate Bond Liquidity Before and After the Onset of the Subprime Crisis

Jens Dick-Nielsen, Peter Feldhütter, David Lando

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

We analyze liquidity components of corporate bond spreads during 2005–2009 using a new robust illiquidity measure. The spread contribution from illiquidity increases dramatically with the onset of the subprime crisis. The increase is slow and persistent for investment grade bonds while the effect is stronger but more short-lived for speculative grade bonds. Bonds become less liquid when financial distress hits a lead underwriter and the liquidity of bonds issued by financial firms dries up under crises. During the subprime crisis, flight-to-quality is confined to AAA-rated bonds.
We analyze liquidity components of corporate bond spreads during 2005–2009 using a new robust illiquidity measure. The spread contribution from illiquidity increases dramatically with the onset of the subprime crisis. The increase is slow and persistent for investment grade bonds while the effect is stronger but more short-lived for speculative grade bonds. Bonds become less liquid when financial distress hits a lead underwriter and the liquidity of bonds issued by financial firms dries up under crises. During the subprime crisis, flight-to-quality is confined to AAA-rated bonds.
LanguageEnglish
JournalJournal of Financial Economics
Volume103
Issue number3
Pages471-492
ISSN0304-405X
DOIs
StatePublished - 2012

Keywords

    Cite this

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    abstract = "We analyze liquidity components of corporate bond spreads during 2005–2009 using a new robust illiquidity measure. The spread contribution from illiquidity increases dramatically with the onset of the subprime crisis. The increase is slow and persistent for investment grade bonds while the effect is stronger but more short-lived for speculative grade bonds. Bonds become less liquid when financial distress hits a lead underwriter and the liquidity of bonds issued by financial firms dries up under crises. During the subprime crisis, flight-to-quality is confined to AAA-rated bonds.",
    keywords = "Corporate bonds, Subprime crisis, Liquidity risk, Liquidity",
    author = "Jens Dick-Nielsen and Peter Feldh{\"u}tter and David Lando",
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    Corporate Bond Liquidity Before and After the Onset of the Subprime Crisis. / Dick-Nielsen, Jens; Feldhütter, Peter; Lando, David.

    In: Journal of Financial Economics, Vol. 103, No. 3, 2012, p. 471-492.

    Research output: Contribution to journalJournal articleResearchpeer-review

    TY - JOUR

    T1 - Corporate Bond Liquidity Before and After the Onset of the Subprime Crisis

    AU - Dick-Nielsen,Jens

    AU - Feldhütter,Peter

    AU - Lando,David

    PY - 2012

    Y1 - 2012

    N2 - We analyze liquidity components of corporate bond spreads during 2005–2009 using a new robust illiquidity measure. The spread contribution from illiquidity increases dramatically with the onset of the subprime crisis. The increase is slow and persistent for investment grade bonds while the effect is stronger but more short-lived for speculative grade bonds. Bonds become less liquid when financial distress hits a lead underwriter and the liquidity of bonds issued by financial firms dries up under crises. During the subprime crisis, flight-to-quality is confined to AAA-rated bonds.

    AB - We analyze liquidity components of corporate bond spreads during 2005–2009 using a new robust illiquidity measure. The spread contribution from illiquidity increases dramatically with the onset of the subprime crisis. The increase is slow and persistent for investment grade bonds while the effect is stronger but more short-lived for speculative grade bonds. Bonds become less liquid when financial distress hits a lead underwriter and the liquidity of bonds issued by financial firms dries up under crises. During the subprime crisis, flight-to-quality is confined to AAA-rated bonds.

    KW - Corporate bonds

    KW - Subprime crisis

    KW - Liquidity risk

    KW - Liquidity

    U2 - 10.1016/j.jfineco.2011.10.009

    DO - 10.1016/j.jfineco.2011.10.009

    M3 - Journal article

    VL - 103

    SP - 471

    EP - 492

    JO - Journal of Financial Economics

    T2 - Journal of Financial Economics

    JF - Journal of Financial Economics

    SN - 0304-405X

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    ER -