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2022, vol. 69, iss. 3, pp. 407-425
Spread determinants in corporate bond pricing: The effect of market and liquidity risks
aBahçeşehir University, Department of Business Administration, Bahçeşehir, Turkey
bFenerbahce University, Department of International Finance, Fenerbahce, Turkey
cGebze Technical University, Department of Management, Gebze, Turkey,,
Keywords: corporate bond; liquidity risk; credit spread; risk premium
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.
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article language: English
document type: Original Scientific Paper
DOI: 10.2298/PAN171024002O
received: 24/10/2017
accepted: 19/09/2019
published in SCIndeks: 08/07/2022
Creative Commons License 4.0

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