Work

Quantifying informational illiquidity in corporate bond markets

Year: 2026

Type: article

Abstract: We develop a credit-risk model to quantify the impact of information asymmetry on corporate bond pricing. In the model, bondholders may sell their bonds either to meet liquidity needs or to exploit informational advantages. To avoid adverse selection, liquidity-shocked bond sellers can reveal their true trading motives at a cost. The model generates a non-monotonic relationship between yield spreads and turnover rates, consistent with empirical evidence. Our calibrated model shows that information asymmetry accounts for 11.2%-21.2% of the overall liquidity costs for investment-grade bonds and 30.8%-38.3% for speculative-grade bonds. The model further offers new policy insights into bond market liquidity.

Source: Journal of International Financial Markets Institutions and Money

DOI: 10.1016/j.intfin.2026.102394

Authors: Hyun Soo Doh, Yiyao Wang

Institutions: Hanyang University, Shanghai Jiao Tong University

Language: English

Topic: Credit Risk and Financial Regulations

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $2,930

Funder: Hanyang University