PT  - JOURNAL ARTICLE
AU  - Scott Richardson
AU  - Diogo Palhares
TI  - (Il)liquidity Premium in Credit Markets: <em>A Myth?</em>
AID  - 10.3905/jfi.2018.1.065
DP  - 2018 Dec 11
TA  - The Journal of Fixed Income
PG  - jfi.2018.1.065
4099  - https://pm-research.com/content/early/2018/12/11/jfi.2018.1.065.short
4100  - https://pm-research.com/content/early/2018/12/11/jfi.2018.1.065.full
AB  - Across multiple measures of “liquidity” and a variety of methods to control for correlated characteristics of more (less) liquid bonds, we find only limited evidence of a liquidity premium in the cross section of corporate bonds. Specifically, although illiquid bonds have slightly higher credit spreads and directionally higher average returns, portfolios that tilt toward (away from) less (more) liquid bonds exhibit considerably higher levels of volatility. Economically, the low Sharpe ratios of illiquidity factor–mimicking portfolios are hard to justify for an investor. This is puzzling, as theory suggests investors should demand a risk premium for holding less-liquid assets.