annualized basisthanthe yieldon themore liquid
Treasury bill, a difference that they attributed to
illiquidity. A subsequent study by Kamara (1994)
confirmedtheirfindingandconcludedthattheyield
difference was 0.37 percent.
35 Strebulaev (2002) conteststheir finding, noting
thatthetaxtreatment onbondsvariesfromthetax
treatmentofTreasurybillsandthatthismayexplain
thedifferenceinyields.HecomparesTreasurynotes
maturingon thesamedateand concludesthatthey
tradeatessentiallyidenticalprices,notwithstanding
big differences in liquidity.
36
- Corporate bonds.Chen, Lesmond, and Wei (2005)
comparedmorethan4,000corporatebondsinboth
investment grade and speculative categories, and
concludedthatilliquidbondshadmuchhigheryield
spreadsthanliquidbonds.Tomeasureliquidity,they
usedmultiplemeasuresincludingthebid-askspread,
the occurrence of zero returns in the time series,
37 and a composite measure (LOT, which
incorporates the bid-ask spread, opportunity costs,
and price impact). Not surprisingly, they find that
liquiditydecreasesas theymovefrom higherbond
ratings to lower ones and increases as they move
fromshort tolong maturities.Comparingyieldson
thesecorporate bonds,theyconcludethat theyield
increases0.21percentforevery 1 percentincreasein
transactions costs for investment grade bonds,
whereastheyieldincreases0.82percentforevery 1
percentincreaseintransactionscostsforspeculative
bonds.
38
