- Subordinated bonds. A study of 211 subordinated
bondsissuedby 22 largebanksintheUnitedStates
concluded that more illiquidbonds tradeat higher
default spreads than otherwise similar liquid bonds.
39 Theauthorsfindthatbondsthathavenottraded
withinthepastsixmonthshaveadefaultspreadthat
isabout0.20percenthigherthanatradedbond,and
thatthisspreadwidensoutto0.64percentwhenthe
bond has not traded in the past two years.
Looking across the studies, the consensus finding is that
liquiditymattersforallbonds,butthatitmattersmorewith
riskybondsthanwithsaferbonds.Thismayexplainwhythe
prevalenceof aliquiditypremium in thegovernment bond
market is debatable but not in the corporate bond market.
Publicly Traded Stocks
Ifliquiditybecomesmoreofanissuewithriskierbondsthan
withsaferbonds,itstandstoreasonthatitshouldbeabigger
factorintheequitymarket(wheretherearemoresourcesof
risk) thanin thebond market. Studiesof illiquidity in the
equitymarket haverunthegamutrangingfrom examining
differences in liquidity across the broad cross section of
stocks and howthey translateinto differences in expected
returnsto morefocusedstudies thattryto findasubset of
stockswhere illiquidityis anissueand attemptto measure
how investors react to that illiquidity.
Equities as a Class
It can be reasonably arguedthat thecosts associated with
trading equities are larger than the costs associated with