maturities. The swap curve is widely used by financial mar-ket participants as the benchmark for the pricing of investment grade corporate bonds. The floating rate is usually the Bank Bill Swap Reference Rate (BBSW) in the Australian market. The Australian interest rate swap market is the most important over

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-authored, while the third is coauthored with William Kinlaw, John Papp, and David Turkington. The first essay examines the liquidity and liquidity risk premia of investment-grade corporate bonds. I build on standard continuous-time structural credit models by incor-porating an illiquid secondary market for bonds

, and Markowitz, 2008 draft paper) explore the theoretical rationale for this result, which hinges on a market inefficiency in which pricing error is uncorrelated with value, rather than being uncorrelated with price. In this paper, we apply the methodology to U.S. investment-grade corporate bonds, U.S. high

at both the individual firm level (see, for example, Kwan (1996)) and portfolio level (see, for example, Blume, Keim and Patel (1991), and Cornell and Green (1991)). These studies focus on corporate bond returns, or yield changes. The main conclusions of these papers are: (1) high-grade bonds behave

mechanism closely resembles a first–price sealed bid auction. We also examine the potential differences between segments of the market and develop a measure of competition based on the theory of auctions. Our measure indicates that competition is highest in US investment grade corporate bonds and lowest

We test the theoretical equivalence of credit default swap (CDS) prices and credit spreads derived by Duffie (1999), finding support for the parity relation as an equilibrium condition. We also find two forms of deviation from parity. First, for three firms, CDS prices are substantially higher than credit spreads for long periods of time, arising from combinations of imperfections in the contract specification of CDSs and measurement errors in computing the credit spread. Second, we find short-lived deviations from parity for all other companies due to a lead for CDS prices over credit spreads in the price discovery process.

that are too low for investment grade corporate bonds; neither does it predict credit spreads that are too high for high yield issues. Our empirical analysis supports the validity of this model over the structural model. When credit spreads are quoted abnormally higher than expected, they tend to persist

data. This model is useful for pricing and hedging corporate debt with imbedded options, for pricing and hedging OTC derivatives with counterparty risk, for pricing and hedging (foreign) government bonds subject to default risk (e.g., municipal bonds), for pricing and hedging credit derivatives

and Bond Liquidity We examine whether liquidity is priced in corporate yield spreads. Using a battery of liquidity measures covering over 4000 corporate bonds and spanning investment grade and speculative categories, we find that more illiquid bonds earn higher yield spreads; and that an improvement