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© 2022 International Monetary Fund
WP/22/98
IMF Working Paper
Monetary and Capital Markets Department
Sovereign Eurobond Liquidity and Yields Prepared by Daniel C. Hardy
Authorized for distribution by Peter Breuer
May 2022
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: Market liquidity is of value to both investors and issuers of securities, and is therefore a crucial factor in asset pricing. For the important asset class of Eurobonds, significant feedback from liquidity to pricing is established, and it is shown that bid-ask spreads (a proxy for market liquidity) and yields are closely related to bond characteristics such as issue volume, time to maturity, the inclusion of collective action clauses, and the jurisdiction of issuance. Debt management offices can choose these characteristics in a way that has economically significant and persistent effects on both liquidity and pricing.
RECOMMENDED CITATION: Hardy, Daniel C. (2022), “Sovereign Eurobond Liquidity and Yields,” IMF Working Paper WP/22/98, February.
| JEL Classification Numbers: | F34, G12, G15, H63 |
| Keywords: | Eurobond yields, bid-ask spread, liquidity, debt management, instrument design |
| Author’s E-Mail Address: | dclhardy@gmail.com |
| JEL Classification Numbers: | F34, G12, G15, H63 |
| Keywords: | Eurobond yields, bid-ask spread, liquidity, debt management, instrument design |
| Author’s E-Mail Address: | dclhardy@gmail.com |
Contents
I. Introduction
II. Background
A. Theory
B. Securities Market Pricing and Liquidity
III. Testable Hypotheses
IV. Estimation Framework
A. Data Sources
B. Definitions
C. Summary Statistics
V. Specification of Reduced Form Regressions
VI. Results of Reduced Form Regressions
A. Bid-Ask Spreads
Using All Explanatory Variables
Using Only Explanatory Variables Known at Time of Issue
B. Yields
Using all Explanatory Variables
Using Only Explanatory Variables Known at Time of Issue
VII. Interaction of Bid-Ask Spreads and Yields
VIII. Summary and Conclusions
References
BOXES
1. CACs and Pari-Passu Clauses
FIGURES
1. Variable Distributions and Scatter Plots
2. Bid-Ask Spread Determinants; Reduced Form Regressions
3. Effects of Issue Volume and Country Volume on the Bid-Ask Spread by Issuer Size
4. Residual Plots for the Reduced Form Regression on the Log Bid-Ask Spread
5. Residual Plots for the Reduced Form Regression on the Log Bid-Ask Spread
6. Bid-Ask Spread Determinants; Reduced Form Regressions Using Only Explanatory Variables Known at Time of Issue
7. Yield Determinants; Reduced Form Regressions
8. Residual Plots for the Reduced Form Regression on the Log Yield
9. Residual Plots for the Reduced Form Regression on the Log Yield; Sub-Sample with Rating>14
10. Yield Determinants; Reduced Form Regressions Using Only Explanatory Variables Known at Time of Issue
11. Yield Determinants; Effect on Yield of the Bid-Ask Spread, Controlling for All Other Explanatory Variables
TABLES
1. Summary of Main Effects
2. Credit Ratings and Numerical Codes
3a. Summary Statistics; Full Sample
3b. Summary Statistics of Transformed Variables; Main Regression Sample
3c. Summary Statistics of Transformed Variables; Sub-Sample with Credit Rating > 14
3d. Summary Statistics of Transformed Variables; Sub-Sample with Total Country Volume < US$10 billion
4: Log Bid-Ask Spread Determinants; Reduced Form Regressions
5. Log Bid-Ask Spread Reduced Form Regressions F Test Results, Full Sample
6: Log Bid-Ask Spread Determinants; Reduced Form Regressions Using only Explanatory Variables Known at Time of Issue
7. Log Bid-Ask Spread Reduced Form Regressions Using only Explanatory Variables Known at Time of Issue; F Test Results; Full Sample Regression
8: Log Yield Determinants; Reduced Form Regressions
9. Log Yield Reduced Form Regressions; F Test Results, Full Sample
10. Log Yield Determinants; Reduced Form Regressions Using only Explanatory Variables Known at Time of Issue
11. Log Yield Reduced Form Regressions Using only Explanatory Variables Known at Time of Issue; F Test Results
12. Log Yield Determinants; Residuals from the Reduced Form Regression for LYLD_EMD Regressed on Residuals from the Reduced Form Regression for LBAS_EMD and Related Variables