TY  - JOUR
AU  - Acharya,Viral V.
AU  - Amihud,Yakov
AU  - Bharath,Sreedhar T.
TI  - Liquidity Risk of Corporate Bond Returns
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 16394
PY  - 2010
Y2  - September 2010
UR  - http://www.nber.org/papers/w16394
L1  - http://www.nber.org/papers/w16394.pdf
N1  - Author contact info:
Viral V. Acharya
Stern School of Business
New York University
44 West 4th Street, Suite 9-84
New York, NY 10012
Tel: 212/998-0354
Fax: 212 995 4233
E-Mail: vacharya@stern.nyu.edu

Yakov Amihud
New York University
Stern School of Business
44 West Fourth Street, Suite 9-190
New York, NY  10012
E-Mail: yamihud@stern.nyu.edu

Sreedhar T. Bharath
Department of Finance
University of Michigan
Room D7606 ER
701 Tappan Street
Ann Arbor, MI 48109-1234
Tel: 734-763-0485
E-Mail:  sbharath@asu.edu
AB  - We study the exposure of the U.S. corporate bond returns to liquidity shocks of stocks and treasury bonds over the period 1973 to 2007. A decline in liquidity of stocks or Treasury bonds produces conflicting effects: Prices of investment-grade bonds rise while prices of speculative grade bonds fall substantially. This effect is regime-switching in nature and holds when the state of the economy is in a "stress" regime. The likelihood of being in such a regime can be predicted by macroeconomic and financial market variables that are associated with adverse economic conditions. Our model can predict the out-of-sample bond returns for the stress years 2008-2009. These effects are robust to controlling for other systematic risks (term and default). Our findings suggest the existence of time-varying liquidity risk of corporate bond returns and episodes of flight to liquidity.
ER  -