Analysis of illiquidity premium in the Russian corporate bond market

<p>The question under consideration in the paper is whether illiquidity, as a characteristic of corporate bond, is an important factor in determining bond pricing and yield in Russian corporate bond market. One of the reasons to study illiquidity is because of the credit spread puzzle that states that the credit risk and exposure to the capital market do not explain high expected returns of the bonds and illiquidity, in turn, can help explain some of the difference. I chose to study Russian market, which is underdeveloped and far smaller than the US, European markets and even markets of some developing countries, as Russian market was not examined much and there are lots of empty spaces to be researched. To lit some light on the Russian market, as it has been already done for few developing markets, I consider a variety of measures in order to account for the quality of those, including age, issue volume, number of non-tradable days, bid-ask spread and the autocovariance measure, introduced by Bao et al. (2011) to check whether illiquidity has explanatory power for the yield of bonds, controlling for a number of factors (risk free premium, credit risk, bond-specific characteristics). This paper provides a valuable insight into illiquidity pricing in the Russian bond market, points out the specificities of the market and differences between Russian market and the ones of developed countries (US) and further highlights the controversy of the matter due to different results for different illiquidity proxies used in the research.</p>