References
Afonso, Antonio, Michael G. Arghyrou, and Alexandros Kontonikas (2015), “The Determinants of Sovereign Bond Yield Spreads in the EMU,” European Central Bank, Eurosystem, Working Paper Series.
Alquist, Ron (2008), “How Important is Liquidity Risk for Sovereign Bond Risk Premia? Evidence from the London Stock Exchange,” Bank of Canada Staff Working Paper 2008-47.
Amihud, Yakov, and Haim Mendelson (1980), “Dealership market: Market-making with inventory,” Journal of Financial Economics, Vol. 8.1, pp. 31–53.
Amihud, Yakov, and Haim Mendelson (1986a), “Asset pricing and the bid-ask spread,” Journal of Financial Economics, Vol. 17, pp. 223–249.
Amihud, Yakov, and Haim Mendelson (1986b), The Effects of Beta, Bid-Ask Spread, Residual Risk, and Size on Stock Returns,” The Journal of Finance, Vol. 44.2, pp. 479–486.
Amihud, Yakov, and Haim Mendelson, (1991), “Liquidity, Maturity, and the Yields on U.S. Treasury Securities,” Journal of Finance, Vol. 46.4, pp. 1411–425.
Amihud, Yakov, and Haim Mendelson (2015), “The Pricing of Illiquidity as a Characteristic and as Risk,” Multinational Finance Journal, Vol. 19.3, pp. 149–168.
Amihud, Yakov, Allaudeen Hameed, Wenjin Kang, and Huiping Zhang (2015), “The Illiquidity Premium: International evidence,” Journal of Financial Economics, Vol. 117(2), pp. 350–368.
Ammer, John, and Fang Cai (2007), “Sovereign CDS and Bond Pricing Dynamics in Emerging Markets: Does the Cheapest-to-Deliver Option Matter?” Board of Governors of the Federal Reserve System, International Finance Discussion Papers No. 912.
Ap Gwilym, Owain, Lourdes Trevino, and Stephen H. Thomas (2002) “Bid-Ask Spreads and the Liquidity of International Bonds,” The Journal of Fixed Income (September), pp. 82–91.
Bao, Jack, Jun Pan, and Jiang Wang (2011), “The Illiquidity of Corporate Bonds,” The Journal of Finance, Vol. 66.3, pp. 911–46.
Bardozzetti, A., and D. Dottori (2014), “Collective action clauses: How do they affect sovereign bond yields?” Journal of International Economics, Vol. 92(2), pp. 286–303.
Becker, Torbjorn I., Anthony J. Richards, and Yunyong Thaicharoen (2001), “Bond Restructuring and Moral Hazard: Are Collective Action Clauses Costly?” IMF Working Paper WP/01/92, August.
Bekaert, Geert, Campbell Harvey, and Christian Lundblad (2007), “Liquidity and Expected Returns: Lessons from Emerging Markets,” The Review of Financial Studies, Vol. 20.6, pp. 1783–1831.
Becker, T., A. Richards, and Y. Thaicharoen (2003), “Bond restructuring and moral hazard: are collective action clauses costly?” Journal of International Economics, Vol. 61.1, pp. 127–161.
Benston, George J., and Robert L. Hagerman (1978), “Risk, Volume and Spread,” Financial Analysts Journal, Vol. 34.1, pp. 46–49.
Bildersee, John S. (1977), “Price Spreads, Performance, and the Seasoning of New Treasury and Agency Bond Issues,” Journal of Financial and Quantitative Analysis, Vol. 12.3, pp. 433–55.
Bildersee, John S. (1979), “Bid-Ask Price Spreads in the Agency Bond Market,” Journal of Money, Credit & Banking, Vol. 11, pp. 209–213.
Bildersee, John S. (1980), “Price Elasticity and Bid-Ask Price Spreads in the Treasury Bond Market,” Journal of Business Research, Vol. 8.1, pp.105–111.
Bolton, Paul, and Olivier Jeanne (2007), “Structuring and Restructuring Sovereign Debt: The Role of a Bankruptcy Regime,” Journal of Political Economy, Vol. 115.6, pp. 901–924.
Bongaerts, Dion, Frank De Jong, and Joost Driessen (2011), “Derivative Pricing with Liquidity Risk: Theory and Evidence from the Credit Default Swap Market,” Journal of Finance, Vol. 66.1, pp. 203–40.
Brandt, Michael W., and Kenneth A. Kavajecz (2004), “Price Discovery in the U.S. Treasury Market: The Impact of Orderflow and Liquidity on the Yield Curve,” Journal of Finance, Vol. 59.6, pp. 2623–654.
Brunnermeier, Markus, and L. H. Pedersen (2009), “Market Liquidity and Funding Liquidity,” Review of Financial Studies, Vol. 22.6, pp. 2201–2238.
Calomiris, Charles W., Mauricio Larrain, Sergio L. Schmukler, and Tomás Williams (2019), “Search for Yield in Large International Corporate Bonds: Investor Behavior and Firm Responses,” Cambridge, Mass: National Bureau of Economic Research Working Paper No.25979.
Carletti, Elena, Paolo Colla, Gaurang Mitu Gulati, and StevenR. G. Ongena (2017), “The Price of Law: The Case of the Eurozone Collective Action Clauses,” SSRN Electronic Journal.
Chacko, George (2005), “Liquidity Risk in the Corporate Bond Markets,” SSRN Electronic Journal.
Chacko, George, Jakub Jurek, and Erik Stafford (2008), “The Price of Immediacy,” The Journal of Finance, Vol. 63.3, pp. 1253–1290.
Chakravarty, Sugato, and Asani Sarkar (2003), “Trading Costs in Three U.S. Bond Markets,” Journal of Fixed Income, Vol. 13.1, pp. 39–48.)
Chamon, M., J. Schumacher, and C. Trebesch (2018), “Foreign-law bonds: Can they reduce sovereign borrowing costs?” Journal of International Economics, Vol.114, pp. 164–179.
Chen, Long, David A. Lesmond, and Jason Wei (2007), “Corporate Yield Spreads and Bond Liquidity,” The Journal of Finance, Vol. 62.1, pp. 119–149.
Choudhry, M. (2008), “The Eurobond Market,” in Fabozzi, Frank J. (Ed.) Handbook of Finance. Hoboken, N.J.: Wiley.
Chung, Kay, and Michael Papaioannou (2020), “Do Enhanced Collective Action Clauses Affect Sovereign Borrowing Costs?” IMF Working Paper WP/20/162.
Csonto, Balazs, and Ixryna Ivaschenko (2013), “Local Fundamentals and Global Factors vs. Ever-Changing Misalignments,” Washington, D.C.: International Monetary Fund, WP/13/164.
De Jong, Frank, and Joost Driessen (2006), “Liquidity Risk Premia in Corporate Bond Markets,” SSRN Electronic Journal.
Devani, Baiju, and Yifan Zhang (2017), “Corporate Bond Markets: Liquidity Determination and Overview,” Investment Industry Regulatory Organization of Canada.
Duffie, Darrell, Lasse Heje Pedersen, and Kenneth J. Singleton (2003), “Modeling Sovereign Yield Spreads: A Case Study of Russian Debt,” Journal of Finance, Vol. 58.1, pp. 119–59.
Dutta, Prajit K., and Ananth Madhavan, (1997), “Competition and Collusion in Dealer Markets,” Journal of Finance, Vol. 52.1, pp. 245–276.
Easley, David, and Maureen O’Hara (1987), “Price, trade size, and information in securities markets,” Journal of Financial Economics, Vol. 19.1, pp. 69–90.
Eichengreen, Barry, and Ashok Mody (2004), “Do Collective Action Clauses Raise Borrowing Costs?” The Economic Journal, Vol. 114.495, pp. 247–264.
Fang, Chuck, Julian Schumacher, and Christoph Trebesch, Christoph (2021), “Restructuring Sovereign Bonds: Holdouts, Haircuts and the Effectiveness of CACs,” European Central Bank Working Paper Ser. No. 2366.
Fang, C., Schumacher, J., and Christian Trebesch (2021), “Restructuring Sovereign Bonds: Holdouts, Haircuts and the Effectiveness of CACs,” IMF Economic Review.
Feyen, Erik, Swati Ghosh, Katie Kibuuka, and Subika Farazi (2015), “Global Liquidity and External Bond Issuance in Emerging Markets and Developing Economies,” World Bank Policy Research Working Paper 7363.
Fleming, Michael J. (2003), “Measuring Treasury Market Liquidity,” Economic Policy Review, Vol. 9.3, pp. 83–108.
Friewald, Nils, Rainer Jankowitsch, and Marti G Subrahmanyam (2012), “Illiquidity or Credit Deterioration: A Study of Liquidity in the US Corporate Bond Market during Financial Crises,” Journal of Financial Economics, Vol. 105.1. pp. 18–36.
Gaillard, Norbert (2012), “Fitch, Moody’s, and S&P Sovereign Ratings and EMBI Global Spreads: Lessons from 1993-2007,” in: Gaillard, Norbert (2012), A Century of Sovereign Ratings. New York: Springer, 2012.
Garbade, Kenneth, and William Silber (1976), “Price Dispersion in the Government Securities Market,” Journal of Political Economy, Vol. 84, pp. 721–40.
Garbade, Kenneth D. D., and William L. L. Silber (1979), “Structural Organization of Secondary Markets: Clearing Frequency, Dealer Activity and Liquidity Risk,” The Journal of Finance, Vol. 34.3, pp. 577–593.
Glosten, Lawrence R, and Paul R Milgrom (1985), “Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders,” Journal of Financial Economics, Vol. 14.1, pp. 71–100.
Grosse Steffen, Christoph, Sebastian Grund, and Julia Schumacher (2019), “Collective Action Clauses in the Euro Area: A Law and Economic Analysis of the First Five Years.” Capital Markets Law Journal Vol. 14.2, pp. 134–54.
Heck, Stephanie, Denis Margaritis, and Aline Muller (2015), “Liquidity Patterns in the U.S. Corporate Bond Market,” 28th Australasian Finance and Banking Conference.
Hilscher, Jens, and Yves Nosbusch (2010), “Determinants of Sovereign Risk: Macroeconomic Fundamentals and the Pricing of Sovereign Debt,” Review of Finance, Vol. 14.2, pp. 235–62.
Houweling, Patrick, Albert Mentink, and Ton Vorst (2005) “Comparing possible proxies of corporate bond liquidity,” Journal of Banking & Finance, Vol. 29.6, pp. 1331–1358.
Hoyos, Ricardo, Yang Liu, Hui Miao, and Christian Saborowski (2020), “Who Drains Bond Market Liquidity in an Emerging Market,” IMF Working Paper WP/20/141.
Hund, John, and David A. Lesmond (2008), “Liquidity and Credit Risk in Emerging Debt Markets,” Tulane University.
Kalimipalli, Madhu, and Arthur Warga (2001), “Bid/Ask Spread and Volatility in the Corporate Bond Market,” The Journal of Fixed Income, March, pp. 31–43.
Ladyman, James, and Karoline Wiesner (2020), What is a Complex System? Yale University Press, USA.
Langedijk, Sven, George Monokroussos, and Evangelia Papanagiotou (2017), “Benchmarking Liquidity Proxies: The Case of EU Sovereign Bonds,” European Commission - Joint Research Centre, Ispra, Italy, Vol. 56, pp. 321–329.
Lesmond, Da (2005) “Liquidity of Emerging Markets,” Journal of Financial Economics, Vol. 77.2, pp. 411–52.
Liu, Qingfu, Renhai Hua, and Yunbi An (2016), “Determinants and Information Content of Intraday Bid-Ask Spreads: Evidence from Chinese Commodity Futures Markets,” Pacific-Basin Finance Journal, Vol. 38, pp. 135–148.
Lo, Andrew w., Harry Mamaysky, and Jiang Wang (2004), “Asset Prices and Trading Volume under Fixed Transactions Costs,” Journal of Political Economy, Vol. 112.5, pp. 1054–090.
Moutot, Philippe, Imma Curato, and Rafaela Guberovic (2017), “Freeze and Bid-Ask Spread in the Sovereign Bond Market,” SSRN Electronic Journal.
O’Hara, Maureen (2003), “Presidential Address: Liquidity and Price Discovery,” The Journal of Finance, Vol. 58.4, pp. vi+1335–1354.
Picarelli, Mattia Osvaldo, Aitor Erce, and Xu Jiang (2018), “The Benefits of Reducing Holdout Risk: Evidence from the Euro CAC Experiment, 2013-2018,” Capital Markets Law Journal, Vol. 14.2, pp. 155–77.
Ratha, Dilip, Supriyo De, and Sergio Kurlat (2016), “Does Governing Law Affect Bond Spreads?” Policy Research Working Paper No. 7863. World Bank, Washington, DC.
Richards, Anthony, and Mark Gugiatti. (2003), “Do Collective Action Clauses Influence Bond Yields? New Evidence from Emerging Markets,” International Finance, Vol. 6.3, pp. 415–47.
Rösch, Christoph G, and Christoph Kaserer (2013), “Market Liquidity in the Financial Crisis: The Role of Liquidity Commonality and Flight-to-quality,” Journal of Banking & Finance, Vol. 37.7, pp. 2284–302.
Schultz, Paul (2001), “Corporate Bond Trading Costs: A Peek Behind the Curtain,” Journal of Finance 56.2, pp. 677–98.
Tanner, J. Ernest, and Levis A. Kochin (1971), “The Determinants of the Difference Between Bid and Ask Prices on Government Bonds,” The Journal of Business, Vol. 44.4, pp. 375–379.
Tsatsaronis, K. (1999), “The effect of collective action clauses on sovereign bond yields.” BIS Quarterly Review: International Banking and Financial Market, November, pp. 22–23.
van der Wansen, Patrick, Lars Jessen, and Diego Rivetti (2019), “Issuing International Bonds; A Guidance Note,” MTI Discussion Paper NO. 13, World Bank.
Vayanos, Dimitri, and Jean‐Luc Vila, (2021), “A Preferred‐Habitat Model of the Term Structure of Interest Rates,” Econometrica, Vol.89 (1) pp. 77–112.
Warga, Arthur (1992), “Bond returns, liquidity, and missing data,” Journal of Financial and Quantitative Analysis, Vol. 27, pp. 605–617.
World Bank (2021), International Debt Statistics 2021, Washington D.C.
Zhang, Michael Yuanjie, Jeffrey R. Russell, and Ruey S. Tsay (2008), “Determinants of Bid and Ask Quotes and Implications for the Cost of Trading,” Journal of Empirical Finance, Vol. 15.4, pp. 656–678.
Vienna University for Economics and Business. Tadeusz Galeza provided important assistance and inputs at an early stage of this project. The paper benefited from constructive comments from Coşkun Cangöz, Sebastian Grund, Joe Kogan, Hui Miao, Robin Tietz, Tomohiro Tsuruga, and participants at seminars at the Vienna University of Economics and Business, the International Monetary Fund, and the Dutch State Treasury Agency, and at the 91st International Atlantic Economic European Conference. Daniel Hardy has recently retired from the IMF and is now based at Vienna University for Economics and Business. The usual disclaimer applies.
Vienna University for Economics and Business. Tadeusz Galeza provided important assistance and inputs at an early stage of this project. The paper benefited from constructive comments from Coşkun Cangöz, Sebastian Grund, Joe Kogan, Hui Miao, Robin Tietz, Tomohiro Tsuruga, and participants at seminars at the Vienna University of Economics and Business, the International Monetary Fund, and the Dutch State Treasury Agency, and at the 91st International Atlantic Economic European Conference. The usual disclaimer applies.
The misleading term “Eurobonds” survives from when they were first issued with the intent of tapping US dollar deposits in Europe.
Choudhry (2008) provides more institutional details. Van der Wansen et al. (2019) provides information on operational matters.
The liquidity of a security is the outcome of the behavior of participants of market in which it is traded, although the securities’ features may affect that behavior. In another use of the term, the liquidity of an institution relates to its holdings of liquid assets relative to its liquid liabilities.
The analyses do not allow for the possible endogeneity of yields.
Another strand of research, represented by Csonto and Ivaschenko (2013) and Feyen et al. (2015), looks at issuance volumes rather than prices.
They focus on annual average yields in excess of a comparable U.S. government bond yield of similar maturity, and annual averages of their liquidity measures.
Calomiris et al. (2019) emphasize the importance of threshold effects in the pricing of emerging market corporate bonds.
Vayanos and Vila (2021) provide a modern version of such a “preferred habitat” theory.
See Calomiris et al. (op. cit.) for a discussion.
Consider issue volume: a country may have an opportunistic issuance strategy, issuing more when conditions are favorable. Nonetheless, the initial issue volume is set for the life of the bond and in particular for the observation period.
Let 1YR (20YR) denote the one-year (20-year) U.S. Treasury yield. Define a weight w=(1+τ)/(MAT_NOW+τ), where τ is a tuning parameter. Thus, w=1 if MAT_NOW=1, and converges to 0 as MAT_NOW increases. Then MAT_NOW_DYC ≡ w.1YR + (1–w).20YR For this sample, τ=3 was chosen to achieve a close approximation to the actual dollar yield curve.
To ensure identification when also a constant term is included in the regression specification, one of such dummies must be excluded.
The support of the distribution of the bid-ask spread, and that of the yield, are narrow and certainly non-negative. Hence, a regression of levels on levels cannot yield normally distributed residuals.
Many explanatory variables indeed are determined years in advance at the time of issuance.
Stata Version 16 was used for all estimation.
Both the flexible functional form and the inclusion of cross-products among explanatory variables distinguish this approach from that taken in past literature.
The observation index is suppressed for the sake of concision.
Cross-products of the credit rating terms with themselves are not included.
With the inclusion of a constant, one observation period dummy and one issue year dummy must be dropped for the specification to be identified.
This procedure works iteratively to down-weight outliers.
The studies of market liquidity summarized above do no report indicators of residual normality, even when they include regressions of levels on levels.
The regressions yield results that can be represented in stylized form as ln(y)=a0+a1ln(x), where y and x are respectively the dependent variable and the (group of) explanatory variable(s); a1 is the parameter estimate for the variable ln(x); and a0 captures the other remainder of the specification. The predicted value of the level of y is therefore given by ŷ = ea1.xa1. To construct the graphs, the term a0 is chosen such that
It is worth noting that yield and liquidity are not the only considerations facing a debt manager. Concentrating issuance in a few large issues increases roll-over risk.
The existing literature concentrates on individual issue size, neglecting the total outstanding for issuer or number of issues.
However, Tanner and Kochin (op. cit.) and Bildersee (1979 and 1980) find that individual issue size matters for the bid-ask spread even on Canadian, agency, or U.S. government bonds, respectively.
Already the summary statistics presented in Table 3c suggested that small issuers are distinctive.
The dividing line was set at total country issuance of US$10 billion, which yields a large number of observations from diverse countries in both sub-samples. Results were not very sensitive to the choice criterion. Broadly similar results were obtained when the sample was split by the total number of issues per country, but that criterion aggregated very small, sporadic issuers such as the Maldives and some very large Middle Eastern issuers who issued their first Eurobonds during the sample period.
Large issuers offer very few securities with an individual volume below US$0.75 billion. Therefore, the non-monotonicity of the curve is not problematic in economic terms.
Analogous results for other markets or other samples are found in Amihud and Mendelsohn (1991), Chakravarty and Sarkar (op. cit.), and Hund and Lesmond (op. cit.), for example.
The relevant F tests presented in Table 5 need to be interpreted with care because LCRR_ISS enters as a cross-product with many other explanatory variables.
Note that current country volume and average issue size are used in the regressions: data on these variables at the time of issuance are not available. However, these variables presumably change relatively slowly and predictably.
Regressions were performed for a full range of samples; for concision, only the moist relevant are reported.
The extra cost may reflect a lower final recovery rate or a lengthier process.
Ultimately, neither spreads nor yields are exogenous. There may be still other explanatory variables, besides those in the sample, the inclusion of which would attenuate the estimated direct, independent interaction between the bid-ask spread and the yield. The results presented in this section may be interpreted as a reflection of the effects of these unobserved variables.
The variables are denoted by R_LYLD; R_LBAS; R_LBAS_SQ; R_LBAS_LCRR; and R_LBAS_LCRR_SQ, respectively.
The same procedure was applied, mutatis mutandis, to relate R_LBAS to residuals from regressions for the four analogous yield-based variables. Results are comparable.
That sub-sample again generates residuals that are far from normally distributed.
Their estimated sensitivities obtained from OLS and GLS are even higher.
Ladyman and Wiesner (op. cit.) discuss how systems can depend on history and memory.