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Corporate Bond Liquidity Before and After the Onset of the Subprime Crisis

by Jens Dick-Nielsen of Copenhagen Business School,
Peter Feldhütter of London Business School, and
David Lando of Copenhagen Business School

March 15, 2011

Abstract: We analyze liquidity components of corporate bond spreads during 2005-2009 using a new robust illiquidity measure. The spread contribution from illiquidity increases dramatically with the onset of the subprime crisis. The increase is slow and persistent for investment grade bonds while the effect is stronger but more short-lived for speculative grade bonds. Bonds become less liquid when financial distress hits a lead underwriter and the liquidity of bonds issued by financial firms dries up under crises. During the subprime crisis, flight-to-quality is confined to AAA-rated bonds.

JEL Classification: C23, G01, G12.

Keywords: Corporate bonds, Liquidity, Liquidity risk, Subprime crisis.

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