Illiquidity – Measures and Effects. An empirical Analysis of the Nordic Corporate Bond Markets

Abstract: We set out to investigate the microstructure of the Nordic corporate bond markets, especially examining bond illiquidity. The aim was to estimate liquidity premiums on excess yield and determining the most suitable illiquidity measure. This was done through panel data analysis consisting of 1231 bonds within the Nordic markets. We considered two models used in previous literature and concluded that ‘Model I’ had a higher explanatory power. We found evidence of possible liquidity premiums of 58.2 bps and concluded that the negative autocovariance of the relative price changes of a bond outperformed the other illiquidity proxies used.