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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 25, No. 3, pp.279-316
ISSN: 1225-0279 (Print)
Print publication date 31 Aug 2012
Received 05 Dec 2011 Revised 13 Feb 2012 Accepted 06 Apr 2012

Pricing Illiquidity of Corporate Bonds through Static and Dynamic Measures

Daisuke Miyakawa ; Shuji Watanabe
Corresponding Author, Associate Senior Economist, Research Institute of Capital Formation, Development Bank of Japan, 1-9-3 Otemachi Chiyoda-ku, Tokyo 100-0004, Japan, Tel: +81-3-3244-1917, Fax: +81-3-3270-7084 damiyak@dbj.jp
Professor, College of Economics, Nihon University, 1-3-2 Misaki-cho, Chiyodaku, Tokyo 102-8360, Japan, Tel: +81-3-3219-3493, Fax: +81-3-3219-3493 watanabe.shuji@nihon-u.ac.jp

JEL Classification: C23, C58, E44, G12

Abstract

This paper studies the price impact of corporate bond illiquidity. Through dynamic panel estimation, price dispersion and resiliency, which have been used separately in extant studies, are simultaneously considered to price illiquidity. We find that the dynamic model, which has both measures, fits better than the static model that incorporates only price dispersion. We also confirm that the impact of the two measures systematically react to credit ratings of bonds. These results imply the importance of considering multiple measures to price illiquidity.

Keywords:

Bond spreads, Illiquidity, Price dispersion, Persistency

Acknowledgments

We appreciate the highly useful comments provided by Yohei Yamamoto, Kei Kawakami, Hidehiko Ishihara, Tsutomu Watanabe, Hirofumi Uchida, Shigenori Shiratsuka, Fumio Hayashi, and Yusho Kaguraoka. Our thanks also go to the anonymous practitioners in a number of security firms and two anonymous referees for their useful comments and suggestions. We also greatly appreciate Tomonori Matsuki, Takeshi Moriya, and Junpei Kanemitsu for their excellent work as research assistants. The usual disclaimer applies. This paper was previously circulated under the title “Walking after Midnight: Measurements and Pricing Implications of Market Liquidity on Corporate Bonds.”

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