Managing Liquidity of Emerging Markets Corporate Debt

Emerging markets (EM) corporate bonds are perceived to offer attractive diversification potential and risk-adjusted returns, but to be illiquid. This study expands the empirical evidence by examining the liquidity of EM debt by solving a triangular structured system. We find EM bond liquidity to both share common determinants with developed markets (DM) and be influenced by macroeconomic factors. As the overall level of liquidity is lower to DM, we propose a liquidity estimation model, which allows systematic factor investors to decrease the share of illiquid assets in their portfolio by roughly 3 p.p. and 10 p.p. during the COVID-19 pandemic