Liquidity and corporate yield spreads: lessons from Tunisian bond market

Abstract

This paper explores the role of liquidity risk in the pricing of corporate bonds. We show that this risk is a priced factor for the credit spread associated with corporate bonds. Therefore, the liquidity spread helps to clarify the credit-spread puzzle. This finding suggests that credit spreads may include a liquidity premium that is ignored by traditional pricing models. Further, corporate bond spreads have insignificant exposures to fluctuations in equity market liquidity.credit spreads; liquidity risk; corporate bonds; Tunisian bond market; Tunisian equity market; liquidity premium; credit spread puzzle; Tunisia; bond pricing.