| Description: |
We analyze whether liquidity is an important price factor in the US corporate bond market. In particular, we focus on whether liquidity effects are more pronounced in periods of financial crises, and moreover, for bonds with high credit risk. We use a unique data-set covering more than 20,000 bonds, between October 2004 and December 2008, to examine three different regimes during our sample period, the GM/Ford crisis in 2005 when a segment of the corporate bond market was affected, the sub-prime crisis since mid-2007, which was much more pervasive across the corporate bond market, and the period in between, when market conditions were more normal. We employ a wide range of liquidity measures and find that liquidity effects account for approximately 14 % of the explained market-wide corporate yield spread changes. Moreover, we find that the economic impact of the liquidity measures increases considerably in periods of crisis; most remarkably, the economic significance more than doubles during the sub-prime crisis compared with the normal period. Exploring the interaction effect between credit and liquidity risk, we find more pronounced liquidity effects |