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

Authors

  • Menevşe Özdemir Dilidüzgün Bahçeşehir University, Department of Business Administration, Turkey
  • Ayşe Altıok Yılmaz Fenerbahce University, Department of International Finance, Turkey
  • Elif Akben Selçuk Gebze Technical University, Department of Management, Turkey

DOI:

https://doi.org/10.2298/PAN171024002O

Keywords:

Corporate bond, Liquidity risk, Credit spread, Risk premium

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.

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Published

2022-06-01

How to Cite

Dilidüzgün, M. Özdemir, Yılmaz, A. A., & Selçuk, E. A. (2022). Spread Determinants in Corporate Bond Pricing: The Effect of Market and Liquidity Risks. Panoeconomicus, 69(3), 407–425. https://doi.org/10.2298/PAN171024002O

Issue

Vol. 69 No. 3 (2022)

Section

Original scientific paper