Quantifying informational illiquidity in corporate bond markets
We develop a structural credit-risk model to quantify the impact of information asymmetry on corporate bond pricing. In the model, bondholders (i) sell their bonds either to meet liquidity needs or to exploit informational advantages and (ii) have the option to credibly reveal their true trading motives to buyers at a cost. Our model generates qualitatively distinct patterns in the relationship between yield spreads and turnover rates across different levels of default risk. This feature enables us to match the observed cross-sectional relationship between these two variables more flexibly in calibration. The calibrated model indicates that information asymmetry accounts for 10.8%–20.5% of overall liquidity costs for investment-grade bonds and 30.1%–37.7% for speculative-grade bonds. The model also offers new policy insights into bond market liquidity.
Authors
- Yiyao Wang (ORCID: https://orcid.org/0000-0001-8098-3008)
- Hyun Soo Doh (ORCID: https://orcid.org/0000-0001-6380-993X)
Institutions
- Shanghai University of Finance and Economics (CN)
- Hanyang University (KR)
- Anyang University (KR)
Publication Details
- Journal
- Journal of International Financial Markets Institutions and Money
- Published
- 2026-09-12
- DOI
- https://doi.org/10.1016/j.intfin.2026.102394
- Primary Topic
- Credit Risk and Financial Regulations
- Type
- article
- Field-Weighted Citation Impact
- 0.00