Measuring the Liquidity Risk Premium in Credit Markets

This article presents a comprehensive analysis of the liquidity risk premium (LRP) in corporate bond markets. We place the exposure-matched approach (EMAP) at the center of the methodological framework, positioning it as the primary tool for isolating and quantifying liquidity-driven spread differentials. EMAP’s portfolio-based, exposure-controlled construction allows the estimation of liquidity premia while netting other systematic risk sources. We complement the EMAP approach with a regression-based robustness check, ensuring statistical consistency and reinforcing our main findings. Using both a transaction cost-based liquidity measure (Barclays Liquidity Cost Score) and a structural liquidity measure based on bond characteristics, we examine US and European investment-grade (IG) and high-yield (HY) markets over the 2011–2026 period. Our results reveal a secular decline in liquidity premia–more pronounced in the United States than in Europe–interrupted by sharp, crisis-driven spikes. The strong correlation between EMAP and regression-based LRP highlights the robustness of the findings and supports the use of EMAP as a practical and economically grounded measure for practitioners.