| Collin-Dufresne, Glodstein, and Martin (2001) and Huang and Huang (2003) indicate that neither the levels nor changes in the yield spread of corporate bonds over treasury bonds can be fully explained by credit risk determinants. The analysis on the quantity of bond liquidity cost is essential for both theses and investment in practice. The traditional liquidity indices are mostly exogenous, and can only measure the liquidity order between different bonds, but can do nothing to the exact level of a bond's liquidity cost. This paper, using the LDV model proposed by Lesmond, Ogden and Trzcinka (1999), makes an analysis on the liquidity of corporate bonds and the treasury bonds traded in the Shanghai Exchange, and finds the treasury bonds are more liquid than corporate bonds traded in the Shanghai Exchange. The results indicate that it's necessary to pay attention to the real environments such as trading system and investors when using the LDV model to estimate the liquidity of the corporate bonds and treasury bonds traded in the Shanghai Exchange. Only one index can hardly measure the liquidity of Shanghai Exchange bond market properly.This paper first reviews the literature about bond market liquidity domestic and abroad and points out that a good liquidity measure must possess the characters of endogenesis and wide adaption. Next I sum up the liquidity of china's bond market from 2005 to 2007 in three terms of trading location, bond category and bond term.Then, with the LDV model, I employ the closing price and trading volume data of the corporate bonds and treasury bonds traded in the Shanghai Exchange to estimate the endogenous liquidity index: round-trip transaction cost. I compare the liquidity measure of round-trip transaction cost with that of zero return, and point out that according to different conditions it's more proper to use different liquidity measures synthetically. In the last, I point out the innovations and the directions of further research concerned this paper. |
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