This 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.
CITATION STYLE
Kim, E., Jang, G. Y., & Kim, S. H. (2023). Pricing Liquidity Risk in the Korean Corporate Bond Market*. Asia-Pacific Journal of Financial Studies, 52(2), 264–291. https://doi.org/10.1111/ajfs.12421
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