series: TI 03-030/2
How to measure Corporate Bond Liquidity?
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We consider eight different measures (issued amount, coupon, listed, age, missing prices, price volatility, number of contributors and yield dispersion) to approximate corporate bond liquidity and use a five-variable model to control for maturity, credit and currency differences between bonds. The null hypothesis that liquidity risk is not priced in our data set of euro corporate bonds is rejected for seven out of eight liquidity measures. We find significant liquidity premia, ranging from 9 to 24 basis points. A comparison test between liquidity measures shows that some ways to measure liquidity are better than others.