Liquidity premia in the cross-section of corporate bonds

Abstract

The purpose of this research is to examine the excess returns in the cross section of corporate bonds for the time period of 4/11/11 until 04/06/13. Through a number of cross sectional regressions, the factors that affect the corporate bond premia are identified and the contribution of each factor to the returns of the corporate bonds is analyzed with statistical evidence. The systemic factors used in the analysis are market-wide liquidity and corporate-treasury yield spreads while in the regression model there are also bond- specific factors such as rating, maturity, security, coupon and a number of other bond characteristics. The results showed that the systemic factors of market-wide liquidity and corporate treasury yield-spreads are important determinants of the excess returns of corporate bonds. Besides, maturity and security are the bond-specific factors with the highest impact on corporate bonds' premia. In addition, the information incorporated in market-wide liquidity is also examined and the factors that have an influence on it are described explicitly.