Realized Volatility, Liquidity, and Corporate Yield Spreads Academic Article uri icon


  • I propose a friction measure of bond round-trip liquidity costs that is robust to outliers and accounts for the idiosyncratic information behind trading decisions. Particularly effective with investment-grade bonds, the proposed measure displays properties consistent with the credit risk puzzle. Using transactions from January 2004 to December 2011, I find that liquidity costs display a strong correlation with credit conditions and peaked during the sub-prime crisis. After controlling for equity volatility with high-frequency measures, liquidity costs explain a substantial fraction of the variation in the yield spreads of highly rated bonds, but become less important for speculative-grade bonds.

author list (cited authors)

  • Rossi, M.

complete list of authors

  • Rossi, Marco

publication date

  • January 2014