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The Impact of Government Debt Supply on Bond Market Liquidity: An Empirical Analysis of the Canadian Market

Author

Listed:
  • Jeffrey Gao
  • Jianjian Jin
  • Jacob Thompson

Abstract

This paper finds that Government of Canada benchmark bonds tend to be more illiquid over the subsequent month when there is a large increase in government debt supply. The result is both statistically and economically significant, stronger for the long-term than the short-term sector, and is robust when other macro factors are controlled for. The result is consistent with the interpretation that risk-averse dealers tend to provide less liquidity to the market when facing increased duration risks brought by large debt issuance. The fact that the newly issued bonds are much less liquid may also contribute to the impact of debt supply on market liquidity.

Suggested Citation

  • Jeffrey Gao & Jianjian Jin & Jacob Thompson, 2018. "The Impact of Government Debt Supply on Bond Market Liquidity: An Empirical Analysis of the Canadian Market," Staff Working Papers 18-35, Bank of Canada.
    • Handle: RePEc:bca:bocawp:18-35
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    References listed on IDEAS

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    Cited by:

    1. Charles Bahr & Lee Hui Shan & Alfred Lam, 2020. "The Macroeconomic Effects of Public Debt: An Empirical Analysis of Evidence from Canada," Journal of Accounting, Business and Finance Research, Scientific Publishing Institute, vol. 10(1), pages 1-9.
    2. Piotr Bartkiewicz, 2021. "The evolution of the Polish government bond market," Public Sector Economics, Institute of Public Finance, vol. 45(1), pages 149-169.
    3. Corey Garriott & Sophie Lefebvre & Guillaume Nolin & Francisco Rivadeneyra & Adrian Walton, 2020. "Alternative futures for Government of Canada debt management," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 12(4), pages 659-685, January.

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    More about this item

    Keywords

    Asset Pricing; Debt Management; Financial markets;
    All these keywords.

    JEL classification:

    • G - Financial Economics
    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets

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