Cyclical variations in liquidity risk of corporate bonds by Cassandre Anténor-Habazac, Georges Dionn
Authors study regime switching features of liquidity risk in corporate bond premiums. Within a sample period ranging from July 2002 to April 2015, they first compute a liquidity risk index for BBB bonds, which considers various liquidity risk facets based on principal component analysis. Second, they identify two liquidity regimes in our sample using a Markov switching regime model that highlights the dynamic characteristics of this risk and its behavior before, during and after the last financial crisis. They observe that the liquidity risk index improved after the financial crisis. It seems that the recent Volcker Rule did not affect the liquidity of BBB bonds during our sample period.