Download or read book Latent Liquidity and Corporate Bond Yield Spreads written by Amrut J. Nashikkar and published by . This book was released on 2008 with total page 47 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recent research has shown that default risk accounts for only a part of the total yield spread on risky corporate bonds relative to their riskless benchmarks. One candidate for the unexplained portion of the spread is a premium for the illiquidity in the corporate bond market. We investigate this issue byrelating the liquidity of corporate bonds, as measured by their ease of market access, to the non-default component of their respective corporate bond yields using the portfolio holdings database of the largest custodian in the market. The ease of access of a bond is measured using a recently developed measurecalled latent liquidity that weights the turnover of funds holding the bond by their fractional holdings of the bond. We use the credit default swap (CDS) prices of the bond issuer to control for the credit risk of a bond. At an aggregate level, we find a contemporaneous relationship between aggregate latent liquidity and the average non-default component in corporate bond yields. Additionally, for individualbonds, we find that bonds with higher latent liquidity have a lower non-default component of their yield spread. We also document that bonds that are held by funds that exhibit greater buying activity command lower spreads (i.e., are more expensive), while the opposite is true for those that exhibitgreater selling activity. We also find that the liquidity in the CDS market has an impact on bond pricing, over and above bond-specific liquidity effects.