This study analyses how liquidity risk affects bonds’ yield spreads after controlling for credit risk, bond-specific characteristics and macroeconomic variables. Using two liquidity estimates, LOT liquidity and the bid-ask spread, we find that, in particular, the LOT liquidity measure has explanatory power for the yield spread of green bonds. Overall, however, the impact of LOT decreases over time, implying that, nowadays liquidity risk is negligible for green bonds.
Febi, W., Schäfer, D., Stephan, A., & Sun, C. (2018). The impact of liquidity risk on the yield spread of green bonds. Finance Research Letters. DOI: 10.1016/j.frl.2018.02.025
Related content: Working paper No. 305