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W. Aussenegg, L.X. Chen, R. Jelic, D. Maringer:
"Does market liquidity risk affect Euro corporate bond returns more seriously in stress periods?";
Bank Underground, October (2016), 5 pages.

Investors require compensation for holding risky assets - an example is the bond liquidity premium for holding debt assets. In stress conditions, market liquidity can evaporate and lead to disorderly movements in prices. The Bank of England´s recent Financial Stability Report (p.29) documents a decline in the market liquidity of some
government and corporate bonds, accompanied by a reduction in dealer activity. Does market liquidity risk affect bond returns more seriously in stress times than in normal times? Does a higher cost of funding for dealers in stress times cause bond returns to be more sensitive to liquidity shocks? Focusing on Euro-dominated
investment-grade corporate bonds, we conduct a quantitative analysis in a regime-switching model, and confirm a `yes´ answer to both of these questions.

http://publik.tuwien.ac.at/files/publik_255784.pdf