This paper explores the role of liquidity risk in the pricing of corporate bonds. We show that liquidity risk is a priced factor for the expected returns on corporate bonds. The exposures of corporate bond returns to fluctuations in treasury bond liquidity and equity market liquidity help to explain the credit spread puzzle. In terms of expected returns, the total estimated liquidity risk premium is around 0.45% for US long-maturity investment grade bonds. For speculative grade bonds, which

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... higher exposures to the liquidity factors, the liquidity risk premium is around 1%. We find very similar evidence for the liquidity risk exposure of corporate bonds using a sample of European corporate bond prices. * We are grateful to Inquire Europe for financial support. We thank Ludovic Phalippou and Michael Fleming for comments on earlier drafts. Abstract This paper explores the role of liquidity risk in the pricing of corporate bonds. We show that liquidity risk is a priced factor for the expected returns on corporate bonds. The exposures of corporate bond returns to fluctuations in treasury bond liquidity and equity market liquidity help to explain the credit spread puzzle. In terms of expected returns, the total estimated liquidity risk premium is around 0.45% for US long-maturity investment grade bonds. For speculative grade bonds, which have higher exposures to the liquidity factors, the liquidity risk premium is around 1%. We find very similar evidence for the liquidity risk exposure of corporate bonds using a sample of European corporate bond prices.