Spread Determinants in Corporate Bond Pricing: The Effect of Market and Liquidity Risks

  • Menevşe Özdemir Dilidüzgün Bahçeşehir University (Turkey)
  • Ayşe Altıok Yılmaz Fenerbahce University (Turkey)
  • Elif Akben Selçuk Gebze Technical University (Turkey)

Abstract

This paper investigates the effect of market and liquidity risks on corporate bond pricing in Turkey, an emerging market, and in Europe. Results show that corporate bond returns have exposure to liquidity factors and not to market factors in both settings. Corporate bonds issued in Turkey have significant exposure to fluctuations in benchmark treasury bond liquidity and corporate bond market liquidity; while corporate bonds issued in Eurozone have exposure to equity market liquidity and are sensitive to fluctuations in a 10-year generic government bond liquidity. The total estimated liquidity risk premium is 0.7% per annum for Turkish “A” and above graded corporate bonds, and 1.08% for the last investment grade level (BBB-) long term bonds. For Eurozone, the total liquidity risk premium is 0.27% for investment grade 5-10 year term bonds, 1.05% for high-yield 1-5 year term bonds and 1.02% for high-yield 5-10 year term category.
Key words: Corporate bond, Liquidity risk, Credit spread, Risk premium.
JEL: G12, G13.

How to Cite
Dilidüzgün M.Ö., Yılmaz A.A., & Selçuk E.A. (2020). Spread Determinants in Corporate Bond Pricing: The Effect of Market and Liquidity Risks. Panoeconomicus, Advance online publication, 1-23. doi:10.2298/PAN171024002O
Section
Original scientific paper