The Size Effect in Intertemporal Discounting and Its Relevance for Credit Spreads in P2P Credit Markets

(Il)liquidity Premium in Credit Markets: A Myth?

The Journal of Fixed Income ◽

10.3905/jfi.2018.1.065 ◽

2019 ◽

Cited By ~ 1

Keyword(s):

Cross Section ◽

Risk Premium ◽

Credit Markets ◽

Corporate Bonds ◽

Credit Spreads ◽

Limited Evidence ◽

Liquidity Premium ◽

Multiple Measures ◽

The Cross ◽

Sharpe Ratios

Across multiple measures of “liquidity” and a variety of methods to control for correlated characteristics of more- (less-) liquid bonds, the authors find only limited evidence of a liquidity premium in the cross section of corporate bonds. Specifically, although illiquid bonds have slightly higher credit spreads and directionally higher average returns, portfolios that tilt toward (away from) less (more) liquid bonds exhibit considerably higher levels of volatility. Economically, the low Sharpe ratios of illiquidity factor–mimicking portfolios are hard to justify for an investor. This is puzzling, as theory suggests investors should demand a risk premium for holding less-liquid assets.

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The Elephant in the Room: The Impact of Labor Obligations on Credit Markets

The American Economic Review ◽

10.1257/aer.20170156 ◽

2020 ◽

Vol 110 (6) ◽

pp. 1673-1712 ◽

Cited By ~ 6

Author(s):

Jack Favilukis ◽

Xiaoji Lin ◽

Xiaofei Zhao

Keyword(s):

Labor Market ◽

Credit Markets ◽

Credit Spreads ◽

Market Frictions ◽

Labor Share ◽

International Firms ◽

Labor Market Frictions ◽

The Impact ◽

Better Than

We show that labor market frictions are first-order for understanding credit markets. Wage growth and labor share forecast aggregate credit spreads and debt growth as well as or better than alternative predictors. They also predict credit risk and debt growth in a cross section of international firms. Finally, high labor share firms choose lower financial leverage. A model with labor market frictions and risky long-term debt can explain these findings, and produce large credit spreads despite realistically low default probabilities. This is because precommitted payments to labor make other committed payments (i.e., interest) riskier. (JEL D33, E23, E24, E25, E44, F23, G32)

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