Determinants of Corporate Bond Yield : Unconditional and Conditional Effect of Liquidity Premium

Abstract

This paper investigates the unconditional and conditional effects of liquidity premium on corporate bond yield spread after controlling for default premium over the period of 2007-2010. Following Longstaff, Mithal, and Neis (2005), I utilize over 15,000 CDS premium data from 28 countries to estimate default premium and 199,000 corporate bonds to estimate liquidity premium. Results show that CDS data explains significant component of corporate yield spread. I proceed to find that unconditional effect of liquidity premium is significant and robust to the inclusion of Longstaff et al. (2005) default premium factor, while conditional effect loses robustness.