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The authors use a unique data-set to study liquidity effects in the US corporate bond market, covering more than 30,000 bonds. The analysis explores time-series and cross-sectional aspects of corporate bond yield spreads, with the main focus being on the quantification of the impact of liquidity factors, while controlling for credit risk. The time period starts in October 2004 when detailed transaction data from the Trade Reporting And Compliance Engine (TRACE) became available. They employ a wide range of liquidity measures and find in the time-series analysis that liquidity effects explain approximately one third of market-wide corporate yield spread changes, in general, and are even more pronounced during periods of crisis.
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