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Manchester Grand Hyatt, Seaport G
American Finance Association
Measuring Bond Liquidity
Sunday, Jan. 5, 2020 8:00 AM - 10:00 AM (PDT)
- Chair: Peter Feldhütter, Copenhagen Business School
Size-Adapted Bond Liquidity Measures and Their Asset Pricing Implications
AbstractWe develop a new class of transaction cost measures for the bond market. Standard liquidity measures suffer from the combination of two effects. First, transaction costs in OTC bond markets strongly depend on trade size. Second, many bonds are traded only scarcely with differing trading volumes over time and in the cross-section. As a result, a change in average transaction costs often indicates a change in the average trade size and not a change in liquidity. Combining full sample information for the size-cost relation with individual transaction data, our new approach does not suffer from such idiosyncratic measurement errors. Compared to standard measures, our size-adapted measures are able to explain a much larger part of yield spread variations. Furthermore, they uncover the joint pricing of liquidity level and corporate bond market liquidity risk in the cross-section of U.S. corporate bonds.
Risk Free Interest Rates
AbstractWe estimate risk free rates unaffected by the convenience yield on safe assets by inferring them from risky options and futures prices. Our data provides time-varying estimates of the term structure of convenience yields from maturities of 1 month to 2.5 years at a minutely frequency. The convenience yield on government bonds equals about 40 basis points on average, is larger below 3 months maturity, and grows substantially during periods of financial distress. With our unique intraday estimates of the term structure of convenience yields, we estimate the high frequency response of convenience yields to monetary policy and quantitative easing. Convenience yields respond most strongly to central bank policy in the depths of the financial crisis, and both conventional and unconventional monetary stimulus reduce convenience yields. Additionally, a factor constructed from our measure of the term structure of convenience yields predicts excess bond returns even when controlling for commonly used factors in the literature. We study the dynamics of a large panel of other arbitrage spreads and find that our implied convenience yields predict other spreads and face the smallest idiosyncratic shocks, suggesting that they are highly informative measures of frictions in financial markets. Finally, we study the dynamics of a large panel of other arbitrage spreads across a variety of different markets and find that our implied convenience yields predict other spreads and face the smallest idiosyncratic shocks, suggesting that they are highly informative measures of frictions in financial markets.
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- G1 - General Financial Markets