The Illiquidity of Corporate Bonds



  • JUN PAN,


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    • Bao is from Ohio State University, Fisher College of Business. Pan is from MIT Sloan School of Management, CAFR, and NBER. Wang is from MIT Sloan School of Management, CAFR, and NBER. The authors thank Campbell Harvey (the Editor), the Associate Editor, two anonymous reviewers, Andrew Lo, Ananth Madhavan, Ken Singleton, Kumar Venkataraman (WFA discussant), and participants at the 2008 JOIM Spring Conference, 2008 Conference on Liquidity at University of Chicago, 2008 Q Group Fall Conference, 2009 WFA Meetings, and seminar participants at Columbia, Kellogg, Rice, Stanford, University of British Columbia, University of California at Berkeley, University of California at San Diego, University of Rhode Island, University of Wisconsin at Madison, and Vienna Graduate School of Finance, for helpful comments. Support from the outreach program of J.P. Morgan is gratefully acknowledged. Bao also thanks the Dice Center for financial support.


This paper examines the illiquidity of corporate bonds and its asset-pricing implications. Using transactions data from 2003 to 2009, we show that the illiquidity in corporate bonds is substantial, significantly greater than what can be explained by bid–ask spreads. We establish a strong link between bond illiquidity and bond prices. In aggregate, changes in market-level illiquidity explain a substantial part of the time variation in yield spreads of high-rated (AAA through A) bonds, overshadowing the credit risk component. In the cross-section, the bond-level illiquidity measure explains individual bond yield spreads with large economic significance.