Working Paper: NBER ID: w27092
Authors: Sergey Chernenko; Adi Sunderam
Abstract: We propose a novel measure of bond market liquidity that does not depend on transaction data: the strength of the cross-sectional relationship between mutual fund cash holdings and fund flow volatility. Our measure captures how liquid funds perceive their portfolio holdings to be at a given point in time. The perceived liquidity of speculative grade and Rule 144A bonds is significantly lower than investment grade bonds in the cross section and deteriorated significantly following the 2008-9 financial crisis. Our measure can be applied in settings where either transaction data are not available or transactions are rare, including the markets for asset-backed securities, syndicated loans, and municipal bonds.
Keywords: bond market liquidity; mutual funds; cash holdings; flow volatility; perceived liquidity
JEL Codes: G12; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| perceived illiquidity (E41) | speculative-grade bonds (H74) |
| perceived illiquidity (E41) | unrated bonds (G12) |
| perceived illiquidity (E41) | Rule 144A bonds (G12) |
| higher yield spreads (G12) | higher perceived illiquidity (G19) |
| financial crisis (G01) | greater illiquidity (G19) |
| speculative-grade bonds (H74) | did not recover post-crisis (H12) |
| Rule 144A bonds (G12) | did not recover post-crisis (H12) |
| flow volatility (C69) | cash-to-assets ratios (G32) |
| cash holdings (E41) | flow volatility (C69) |