TY - JOUR T1 - (Il)liquidity Premium in Credit Markets: <em>A Myth?</em> JF - The Journal of Fixed Income DO - 10.3905/jfi.2018.1.065 SP - jfi.2018.1.065 AU - Scott Richardson AU - Diogo Palhares Y1 - 2018/12/11 UR - https://pm-research.com/content/early/2018/12/11/jfi.2018.1.065.abstract N2 - 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. ER -