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    Measuring the Perceived Liquidity of the Corporate Bond Market
    29 Jun 2020Working Paper Summaries

    Measuring the Perceived Liquidity of the Corporate Bond Market

    by Sergey Chernenko and Adi Sunderam
    The liquidity of corporate bond markets is crucial to their functioning. This paper proposes a novel measure of bond market liquidity based on portfolio holdings instead of transaction data. The measure can be applied to asset-backed securities, syndicated loans, and municipal securities for which publicly available data on transactions are not available.
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    Author Abstract

    We propose a novel measure of bond market liquidity that does not depend on transaction data: the strength of the cross-sectional relationship between mutual fund cash holdings and fund flow volatility. Our measure captures how liquid funds perceive their portfolio holdings to be at a given point in time. The perceived liquidity of speculative grade and Rule 144A bonds is significantly lower than investment grade bonds in the cross section and deteriorated significantly following the 2008–2009 financial crisis. Our measure can be applied in settings where either transaction data are not available or transactions are rare, including the markets for asset-backed securities, syndicated loans, and municipal bonds.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: May 2020
    • HBS Working Paper Number: NBER Working Paper Series, No. 27092
    • Faculty Unit(s): Finance
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    Adi Sunderam
    Adi Sunderam
    Willard Prescott Smith Professor of Corporate Finance
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