Empirical Asset Pricing
Session Chair: Lucie Lu, University of Melbourne
The More Illiquid, The More Expensive: The Reversal of the Liquidity Premium in Corporate Bonds
Jaewon Choi; University of Illinois Urbana-Champaign
Jungsuk Han; Seoul National University
Sean Seunghun Shin; Aalto University
Ji Hee Yoon; University College London
We show that illiquid bonds can become more expensive than liquid bonds with almost identical cash flows during market distress times. The economic mechanism behind the results is search frictions. When the search friction is high, marginal traders prefer to sell liquid bonds at lower prices than illiquid bonds because failure to find buyers can be costly. We empirically identify the reversed liquidity premium through within-issuer-date matching of bonds and the regression discontinuity design based on newly issued corporate bonds. In both the identification settings, we find that the yield differentials between illiquid and liquid bonds become negative during the market distress times. Using insurance company trades, we document transaction-level evidence for the reversed liquidity premium for same-issuer bonds on the same day that are traded by the same insurer.
Discussant: Eduard Inozemtsev, University of Melbourne
The Relative Price Premium
Yun Joo An; Indiana University
Fotis Grigoris; University of Iowa
Christian Heyerdahl-Larsen; BI Oslo
Preetesh Kantak; Indiana University
This study shows that relative price dispersion impacts risk premia. Notably, firms associated with goods and services that have increased (decreased) in price relative to the headline inflation rate earn high (low) returns. We refer to this return spread of 0.88% per month as the relative
price premium. We rationalize the premium via a consumption-based asset-pricing model that features imperfectly substitutable goods and an investor with preferences for the mix of goods consumed. As shocks to relative prices induce the investor to consume a suboptimal bundle of goods, high price dispersion signals bad times for the investor and the economy.
Discussant: Sang Byung Seo, Wisconsin School of Business