Affiliation:
1. School of Business Administration Soongsil University Republic of Korea
2. Business School Hanyang University Republic of Korea
Abstract
AbstractThis study investigates the pricing of liquidity risk in the Korean corporate bond market. We use three different liquidity factors — namely, aggregate market liquidity, liquidity innovation, and predicted liquidity. The empirical results show that, while a liquidity premium exists in the Korean corporate bond market when measured by the market liquidity factor, a liquidity discount occurs when measured by the predicted liquidity factor. Drawing on prior studies, we further describe that the lower (higher) returns for portfolios with a high sensitivity to unexpected liquidity shocks may be attributable to the infrequent (frequent) trading of AAA(A)‐rated bonds in the Korean market. Finally, our findings suggest that while a liquidity premium exists in expectation, investors are penalized for taking predicted liquidity risks in the Korean corporate bond market.