Yield-Chasing

  • 详情 The Evolving Liquidity Premium in a Retail Driven Corporate Bond Market
    This paper examines how liquidity is priced in the Chinese corporate bond market. Unlike the pervasive liquidity premium across bonds traded in the interbank market, we document a puzzle in the liquidity-yield relation in the exchange market. Before the first significant credit event in March 2014, there was a "liquidity discount" in this market-the more illiquid a corporate bond, the lower its yield spread. This liquidity discount disappears after the first bond default event. The liquidity premium, i.e., a positive relation between illiquidity and yield, emerged when the credit condition for corporate bonds worsened after April 2018. We find that retail investors' yield-chasing behavior in the exchange market is the driving factor behind the liquidity discount effect. The liquidity discount is stronger for bonds favored by retail investors and during the period with a high intensity of yieldchasing behavior. Our empirical analysis further shows that our findings are not due to two alternative hypotheses based on the market microstructure effects of liquidity concentration and nonsynchronous trading.
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