The Bond Coupon’s Impact on Liquidity


Corporate bond investors are compensated for liquidity and counter-party risk in the yield received in excess of the credit premium and risk-free rate. This paper shows that the liquidity premium as a hedge against uncertain future states is determined by the ratio of excess coupon payments after paying for credit protection to the capital gain realized after hedging interest rate risk. The liquidity premium increases with the time that investors must wait for compensation. The results suggest that the way in which investors receive compensation for liquidity risk is a more significant determinate of the liquidity premium than turnover.

Jun 4, 2015
University of Economics and Law
Ho Chi Minh City,
Stephen Rush
Assistant Professor of Finance

My research interests include Market Microstructure, Empirical Asset Pricing, and Investment Management