Title: Liquidity and corporate yield spreads: lessons from Tunisian bond market

Authors: Tarek Chebbi, Slaheddine Hellara

Addresses: Faculte de Droit, Sciences Economiques et Politiques de Sousse, Universite de Sousse, BESTMOD, Cite Erriadh – 4023 Sousse, Tunisie. ' Institut Superieur de Gestion de Tunis, Universite de Tunis, BESTMOD, 41, Rue de la Liberte, Cite Bouchoucha 2000 Le Bardo, Tunis – Tunisie

Abstract: This paper explores the role of liquidity risk in the pricing of corporate bonds. We show that this risk is a priced factor for the credit spread associated with corporate bonds. Therefore, the liquidity spread helps to clarify the credit-spread puzzle. This finding suggests that credit spreads may include a liquidity premium that is ignored by traditional pricing models. Further, corporate bond spreads have insignificant exposures to fluctuations in equity market liquidity.

Keywords: credit spreads; liquidity risk; corporate bonds; Tunisian bond market; Tunisian equity market; liquidity premium; credit spread puzzle; Tunisia; bond pricing.

DOI: 10.1504/IJMEF.2010.033454

International Journal of Monetary Economics and Finance, 2010 Vol.3 No.3, pp.207 - 226

Published online: 02 Jun 2010 *

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