Pricing Liquidity Risk in the Korean Corporate Bond Market
- Authors
- Kim, Eunji; Jang, Ga-Young; Kim, Soo-Hyun
- Issue Date
- Apr-2023
- Publisher
- WILEY
- Keywords
- Amihud illiquidity; Corporate bonds; Liquidity shock
- Citation
- ASIA-PACIFIC JOURNAL OF FINANCIAL STUDIES, v.52, no.2, pp.264 - 291
- Journal Title
- ASIA-PACIFIC JOURNAL OF FINANCIAL STUDIES
- Volume
- 52
- Number
- 2
- Start Page
- 264
- End Page
- 291
- URI
- http://scholarworks.bwise.kr/ssu/handle/2018.sw.ssu/44179
- DOI
- 10.1111/ajfs.12421
- ISSN
- 2041-9945
- Abstract
- This study investigates the pricing of liquidity risk in the Korean corporate bond market. We use three different liquidity factors - namely, aggregate market liquidity, liquidity innovation, and predicted liquidity. The empirical results show that, while a liquidity premium exists in the Korean corporate bond market when measured by the market liquidity factor, a liquidity discount occurs when measured by the predicted liquidity factor. Drawing on prior studies, we further describe that the lower (higher) returns for portfolios with a high sensitivity to unexpected liquidity shocks may be attributable to the infrequent (frequent) trading of AAA(A)-rated bonds in the Korean market. Finally, our findings suggest that while a liquidity premium exists in expectation, investors are penalized for taking predicted liquidity risks in the Korean corporate bond market.
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