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There are three important dimensions of liquidity: trading costs, depth, and resiliency. We investigate the relevance of each of these three dimensions of liquidity - separately and in conjunction - for the pricing of corporate bonds. Unlike previous studies, our sample allows us to cleanly separate the default and non-default components of yield spreads. We find that each of the above three dimensions of liquidity are priced factors. Overall, in our sample, a one standard deviation change in trading costs, resiliency, and depth measures lead to a change in non-default spreads of 5.00 basis points, 2.27 basis points, and 1.27 basis points, respectively. We also find that both bond-specific and market-wide dimensions of liquidity are priced in non-default spreads. Finally, we find that there does exist in some periods a small residual non-default yield spread that is consistent with an additional flight-to-extreme-liquidity premium reflecting investor preference for assets that enable quickest possible disengagement from the market when necessary. (C) 2016 Elsevier B.V. All rights reserved.

Seminal market microstructure literature identifies at least three important dimensions of liquidity: trading costs, depth, and resiliency. We investigate the relevance of each of these three dimensions of liquidity - separately and in conjunction - for the pricing of corporate bonds. Unlike previous studies, our sample allows us to cleanly separate the default and non-default components of yield spreads. We find that each of the above three dimensions of liquidity impact non-default spreads, with trading costs and resiliency being more important than depth. We also find that both bond-specific and market-wide dimensions of liquidity are priced in non-default spreads. Finally, we find that, even though these three dimensions of liquidity account for virtually the entire non-default spread, there does exist in some periods a small residual non-default yield spread that is consistent with an additional "flight-to-extreme-liquidity" premium reflecting investor preference for assets that enable quickest possible disengagement from the market when necessary.