TAILIEUCHUNG - Corporate bondliquiditybeforeandaftertheonsetofthe subprime crisis$

We analyzeliquiditycomponentsofcorporatebondspreadsduring2005–2009usinga new for investmentgradebondswhiletheeffectisstrongerbutmoreshort-livedfor underwriterandtheliquidityofbondsissuedbyfinancialfirmsdriesupundercrises. Duringthesubprimecrisis,flight-to-qualityisconfinedtoAAA-ratedbonds | Journal of Financial Economics 103 2012 471-492 Contents lists available at SciVerse ScienceDirect Journal of Financial Economics journal homepage locate jfec Corporate bond liquidity before and after the onset of the subprime crisis Jens Dick-Nielsen a Peter Feldhutterb David Lando a n a Department of Finance Copenhagen Business School Solbjerg Plads 3 DK-2000 Frederiksberg Denmark b London Business School Regent s Park London NW1 4SA United Kingdom ARTICLE INFO ABSTRACT Article history Received 6 July 2010 Received in revised form 9 May 2011 Accepted 28 May 2011 Available online 3 November 2011 JEL classification C23 G01 G12 Keywords Corporate bonds Liquidity Liquidity risk Subprime crisis 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. 2011 Elsevier . All rights reserved. 1. Introduction The onset of the subprime crisis caused a dramatic widening of corporate bond spreads. In light of the strong We thank Yakov Amihud Sreedhar Bharath Jeff Bohn Michael Brennan Tom Engsted Edie Hotchkiss Loriano Mancini Marco Pagano Lasse Pedersen Ilya Strebulaev and participants at seminars at the Goethe University in Frankfurt Danmarks Nationalbank Deutsche Bundesbank ECB AQR Asset Management Moody s Investors Service Oesterreichische Nationalbank CBS NYU PenSam VU University Amsterdam USI Lugano and at conferences in Bergen EFA Konstanz Florence London Moody s 7th Credit Risk Conference 2011 EPFL Lausanne and Venice for helpful .

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