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Liquidity in JGB Markets: An Evaluation from Transaction Data

Author

Listed:
  • Tetsuo Kurosaki

    (Bank of Japan)

  • Yusuke Kumano

    (Bank of Japan)

  • Kota Okabe

    (Bank of Japan)

  • Teppei Nagano

    (Bank of Japan)

Abstract

There is no single, widely-accepted definition of "market liquidity" even though the expression "market liquidity is high/low" is frequently used, and measuring market liquidity is not easy. Recognizing these challenges, this paper formulates a set of new liquidity indicators using transaction data of the markets related to Japanese government bonds (JGBs), including futures, cash, and special collateral (SC) repo, thereby examining market liquidity from various angles. Traditional liquidity indicators of the JGB futures market such as the bid-ask spread and the daily price range to transaction volume ratio suggest that liquidity in the JGB market has not declined significantly, even after the expansion of quantitative and qualitative monetary easing (QQE) in October 2014. However, the indicators newly formulated in this paper -- the volume of limit orders at the best-ask price, the impact of a unit volume of transactions on the market price in the JGB futures market, the divergence in quotes offered by dealers in the JGB cash market, and the lending fee of JGBs in the SC repo market -- all suggest that liquidity in the JGB market has been declining since fall 2014. While this may be a temporary phenomenon following the rapid decline in the long-term yield observed after the expansion of QQE as well as the short- and medium-term yields turning negative, it may also reflect other factors such as the massive purchases of JGBs by the Bank of Japan, structural changes in the markets, and regulatory changes. These findings underscore the need to monitor liquidity in the JGB market continuously and from many sides, using various indicators. In addition, it is important to enhance dialogue with market participants, thereby carefully monitoring the market's view on liquidity, which does not show up in the aforementioned indicators.

Suggested Citation

  • Tetsuo Kurosaki & Yusuke Kumano & Kota Okabe & Teppei Nagano, 2015. "Liquidity in JGB Markets: An Evaluation from Transaction Data," Bank of Japan Working Paper Series 15-E-2, Bank of Japan.
    • Handle: RePEc:boj:bojwps:wp15e02
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    References listed on IDEAS

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    2. Patrick Aldridge & David Cimon & Rishi Vala, 2023. "Central Bank Crisis Interventions: A Review of the Recent Literature on Potential Costs," Discussion Papers 2023-30, Bank of Canada.
    3. Boneva, Lena & Islami, Mevlud & Schlepper, Kathi, 2024. "Liquidity in the German corporate bond market: Has the CSPP made a difference?," Journal of International Money and Finance, Elsevier, vol. 147(C).
    4. Isao Yagi & Yuji Masuda & Takanobu Mizuta, 2020. "Analysis of the Impact of High-Frequency Trading on Artificial Market Liquidity," Papers 2010.13038, arXiv.org.
    5. Lena Boneva & David Elliott & Iryna Kaminska & Oliver Linton & Nick McLaren & Ben Morley, 2022. "The Impact of Corporate QE on Liquidity: Evidence from the UK," The Economic Journal, Royal Economic Society, vol. 132(648), pages 2615-2643.
    6. Mr. Fei Han & Dulani Seneviratne, 2018. "Scarcity Effects of Quantitative Easing on Market Liquidity: Evidence from the Japanese Government Bond Market," IMF Working Papers 2018/096, International Monetary Fund.
    7. Christensen, Jens H.E. & Spiegel, Mark M., 2023. "Central bank credibility during COVID-19: Evidence from Japan," Journal of International Money and Finance, Elsevier, vol. 131(C).
    8. Linas Jurksas & Deimante Teresiene & Rasa Kanapickiene, 2021. "Liquidity Spill-Overs in Sovereign Bond Market: An Intra-Day Study of Trade Shocks in Calm and Stressful Market Conditions," Economies, MDPI, vol. 9(1), pages 1-22, March.
    9. Takanobu Mizuta & Sadayuki Horie, 2019. "Mechanism by which active funds make market efficient investigated with agent-based model," Evolutionary and Institutional Economics Review, Springer, vol. 16(1), pages 43-63, June.
    10. Mr. Serkan Arslanalp & Mr. Dennis P Botman, 2015. "Portfolio Rebalancing in Japan: Constraints and Implications for Quantitative Easing," IMF Working Papers 2015/186, International Monetary Fund.
    11. Inaba, Kei-Ichiro, 2020. "Japan’s impactful augmentation of quantitative easing sovereign-bond purchases," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    12. Boneva, Lena & Islami, Mevlud & Schlepper, Kathi, 2021. "Liquidity in the German corporate bond market: Has the CSPP made a difference?," Discussion Papers 08/2021, Deutsche Bundesbank.
    13. Toshiyuki Sakiyama & Tetsuya Yamada, 2016. "Market Liquidity and Systemic Risk in Government Bond Markets: A Network Analysis and Agent-Based Model Approach," IMES Discussion Paper Series 16-E-13, Institute for Monetary and Economic Studies, Bank of Japan.
    14. Naoshi Tsuchida & Toshiaki Watanabe & Toshinao Yoshiba, 2016. "The Intraday Market Liquidity of Japanese Government Bond Futures," IMES Discussion Paper Series 16-E-07, Institute for Monetary and Economic Studies, Bank of Japan.
    15. Toshiyuki Sakiyama & Shun Kobayashi, 2019. "Liquidity in the JGB cash market: an evaluation from detailed transaction data," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Are post-crisis statistical initiatives completed?, volume 49, Bank for International Settlements.

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    More about this item

    Keywords

    JGB market; market liquidity; transaction data; SC repo;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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