The evolving liquidity premium in a retail-driven corporate bond market

Purpose This study aims to investigate the empirical relation between illiquidity and yield spread in China's corporate bond market. Design/methodology/approach We rely on panel regressions to identify the empirical relation between illiquidity and bond yield spread. Findings We find a significant liquidity discount instead of liquidity premium for corporate bonds traded in the exchange market in China prior to 2014. The discount becomes insignificant afterward and ultimately turns positive after 2018. By contrast, in the interbank market, the liquidity premium effect persists. We relate the liquidity discount in the exchange market to retail investors’ yield-chasing behavior. Originality/value This study is the first to document the significant liquidity discount in the exchange market for corporate bonds, in contrast to the liquidity premium in the interbank market. This study is also the first to link the liquidity discount to investors’ yield-chasing behavior.