Quantifying liquidity and default risks of corporate bonds over the business cycle

Hui Chen, Rui Cui, Zhiguo He, Konstantin Milbradt

Research output: Contribution to journalArticlepeer-review

61 Scopus citations


We develop a structural credit model to examine how interactions between default and liquidity affect corporate bond pricing. The model features debt rollover and bond-pricedependent holding costs. Over the business cycle and in the cross-section, the model matches average default rates and credit spreads in the data, and captures variations in bid-Ask and bond-CDS spreads. A structural decomposition reveals that default-liquidity interactions can account for 10%-24% of the level of credit spreads and 16%-46% of the changes in spreads over the business cycle. Further, liquidity-related corporate bond financing costs amount to 6% of the total issuance amount from 1996 to 2015.

Original languageEnglish (US)
Pages (from-to)852-897
Number of pages46
JournalReview of Financial Studies
Issue number3
StatePublished - Mar 1 2018

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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