Liquidity spreads in the corporate bond market: Estimation using a semi-parametric model
Journal
Journal of Applied Statistics
Journal Volume
37
Journal Issue
3
Pages
359-374
Date Issued
2010
Author(s)
Chang, J.H.
Abstract
This study utilizes the liquidity risk associated with Treasury bonds to directly determine the degree to which liquidity spreads account for corporate bond spreads. This enhances understanding of their relative contributions to the yield spreads of corporate bonds. To capture time variation on instantaneous spreads and volatility and to reduce modeling bias, semi-parametric techniques are applied to estimate the time-varying intensity process. Empirical results indicate that our semi-parametric model is good at capturing the time variation in default and liquidity intensity processes. The credit spreads are due to default risk and reflect the relative liquidity of the corporate bond market, indicating that liquidity risk plays an important role in corporate bond valuation.
Type
journal article