Stock liquidity and corporate bond yield spreads: Theory and evidence

Henry H. Huang, Hung Yi Huang, Jeffrey J. Oxman

Research output: Contribution to journalArticlepeer-review

13 Scopus citations

Abstract

We examine the impact of individual stock liquidity on corporate bond yield spreads in the U.S. market. By extending the endogenous-default model to include stock liquidity in the calculation of bond value we show that a drop in stock liquidity will increase the firm's credit risk by increasing the firm's default boundary, leading to an increase of the credit spread. Our model is consistent with the sharp increase in credit risk premiums and the "yield spread spike" phenomenon in corporate bond markets during the financial crisis. We present empirical evidence supportive of our model.

Original languageEnglish
Pages (from-to)59-91
Number of pages33
JournalJournal of Financial Research
Volume38
Issue number1
DOIs
StatePublished - 1 Mar 2015

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