Comparing possible proxies of corporate bond liquidity
Journal of Banking & Finance , Volume 29 - Issue 6 p. 1331- 1358
We consider nine different proxies (issued amount, listed, euro, on-the-run, age, missing prices, yield volatility, number of contributors and yield dispersion) to measure corporate bond liquidity and use a four-variable model to control for interest rate risk, credit risk, maturity and rating differences between bonds. The null hypothesis that liquidity risk is not priced in our data set of euro corporate bonds is rejected for eight out of nine liquidity proxies. We find significant liquidity premia, ranging from 13 to 23 basis points. A comparison test between liquidity proxies shows limited differences between the proxies.
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Houweling, P, Mentink, A, & Vorst, A.C.F. (2005). Comparing possible proxies of corporate bond liquidity. Journal of Banking & Finance, 29(6), 1331–1358. doi:10.1016/j.jbankfin.2004.04.007