Determinanter for illikviditet i erhvervsobligationer

Oliver K. Dahlstrøm & Daniel Friis Jensen

Student thesis: Master thesis

Abstract

The turmoil of the financial crisis has led to a decrease in corporate lending of 30% and a situation which the media refers to as “the credit drought”. In the light of this situation there has been an increasing interest in corporate bonds as an alternative source of financing for Danish companies. The Danish corporate bond market, however, is still very underdeveloped and the reason for this is believed to be due to asset and market illiquidity. This study aims to uncover the determinants of liquidity premia in corporate bonds by analyzing realized trades in 2,291 American corporate bonds from 2002 to 2012. We construct a multiple linear regression model consisting of 23 di↵erent variables to account for: liquidity, individual bond characteristics, macroeconomic conditions, issuer specific characteristics, and credit rating. We apply three measures of liquidity: Amihud’s measure of price impact, Imputed Roundtrip Costs, and Turnover. We find that out of a median yield spread of 133 basispoints the spread contribution from illiquidity constitutes 9,58 basis points. An increase in both the price impact of trades and imputed roundtrip costs is associated with widening spreads. The economic influence of turnover, however, is consistantly negligible and is often statistically insignificant. We find that a low credit rating is associated with higher liquidity costs, and that the spread widening during the financial crisis is in part due to increasing price impact of trades and transaction costs for AAA, AA and A ratings. For BBB and speculative ratings we find lower transaction costs during the crisis. We find that smaller bonds are typical less traded than larger bonds, though investors do seem to require compensation for the reduced turnover. Smaller bonds typically have higher spreads due to the price impact of trades, but the e↵ect is o↵set by lower transaction costs. Similar evidence is found for issuer size with the main di↵erence being constant transaction costs. Lastly, we examine the e↵ect of having multiple issues outstanding, which is found to be positively associated with liquidity. For the final part of this thesis, we perform a comparative analysis of our results on the prospects of having a fully developed Danish corporate bond market. We find that both the limited size of the companies operating there, and the financing needs they face, makes liquidity e↵ects a serious concern. Furthermore, the inability of Danish companies to attain a high credit rating might further hamper liquidity.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2014
Number of pages171