Managing Liquidity of Emerging Markets Corporate Debt

Emerging market 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 emerging market debt by solving a triangular structured system. We find emerging market bond liquidity both to share common determinants with developed markets and be influenced by macroeconomic factors. As the overall level of liquidity is lower than in developed markets, we propose a liquidity estimation model, which allows systematic factor investors to decrease the share of illiquid assets in their portfolio by roughly 3 percentage points and 10 percentage points during the COVID-19 pandemic.