Comparing Possible Proxies of Corporate Bond Liquidity

by Patrick Houweling of Robeco Asset Management,
Albert Mentink of Erasmus University Rotterdam & AEGON Asset Management, and
Ton Vorst of Erasmus University Rotterdam Rotterdam & ABN Amro

June 2005

Abstract: We consider nine different proxies (issued amount, listed, euro, on-the-run, age, missing prices, yield volatility, number of contributors and yield dispersion) to measure corporate bond liquidity and use a four-variable model to control for interest rate risk, credit risk, maturity and rating differences between bonds. The null hypothesis that liquidity risk is not priced in our data set of euro corporate bonds is rejected for eight out of nine liquidity proxies. We find significant liquidity premia, ranging from 13 to 23 basis points. A comparison test between liquidity proxies shows limited differences between the proxies.

JEL Classification: C13, G12.

Keywords: liquidity, corporate bonds, Fama-French model, euro market.

Published in: Journal of Banking & Finance, Vol. 29, No. 6, (June 2005), pp. 1331-1609.

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Previously titled: "How to Measure Corporate Bond Liquidity?" and before that, "Is Liquidity Reflected in Bond Yields? Evidence from the Euro Corporate Bond Market"

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