Published online by Cambridge University Press: 06 September 2018
We analyze the impact of market frictions on the trading volume and liquidity premia of finite-maturity assets when investors differ in their trading needs. Our equilibrium model generates a clientele effect (frequently trading investors hold only short-term assets) and predicts i) a hump-shaped relation between trading volume and maturity, ii) lower trading volumes of older compared with younger assets, iii) an increasing liquidity term structure from ask prices, iv) a decreasing or U-shaped liquidity term structure from bid prices, and v) spillovers of liquidity from short-term to long-term maturities. Empirical tests for U.S. corporate bonds support our theoretical predictions.
We thank conference participants at the 2013 Financial Risks International Forum on Liquidity, the 2013 Colloquium on Financial Markets, the 2013 Financial Management Association (FMA) European Conference, the 2013 meeting of the German Finance Association (DGF), and the 2015 Annual Meeting of the German Academic Association for Business Research (VHB). We also thank seminar participants at Copenhagen Business School, College of William & Mary, the University of Southern Denmark, the University of Freiburg, the University of St. Gallen, and the University of Tübingen, as well as George Angelopoulos, Patrick Augustin, Antje Berndt, Marc Crummenerl, Jens Dick-Nielsen, Frank de Jong, Peter Feldhütter, Bernd Fitzenberger, Joachim Grammig, Rainer Jankowitsch, Alexander Kempf, Sven Klingler, Holger Kraft, David Lando, Linda Larsen, Siegfried Trautmann, and Nils Unger for helpful comments and suggestions. The article greatly benefited from comments by Hendrik Bessembinder (the editor) and an anonymous referee. We also thank the Amazon Web Services (AWS) Cloud Credits for Research Program for support. An earlier version of this article was circulated under the title “A Heterogeneous Agents Equilibrium Model for the Term Structure of Bond Market Liquidity.”