This study investigates the impact of liquidity factors on bond returns in the Korean corporate bond market for the period from 2010 to 2020. The study uses three liquidity factors, the aggregate market-level liquidity, (unpredicted) liquidity innovation, and predicted liquidity. When incorporating these along with market, size, value, maturity, and default factors, the empirical results reveal a positive relationship between liquidity beta and average excess returns on corporate bonds. Using quintile portfolios divided by credit ratings, the returns of highly rated bonds show high sensitivities to market liquidity and liquidity innovation, and the portfolios with high sensitivities to liquidity risk generate higher expected bond returns. The results not only indicate the existence of liquidity premium in the Korean bond market, but also show that such effect is primarily explained by liquidity innovation, a novel contribution of this study. 

JEL Classification(s): G12, G14

Keyword(s): Amihud illiquidity, bond, excess return, liquidity, liquidity shock​