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Liquidity of China’s Government Bond Market: Measures and Driving Forces

Author

Listed:
  • Han, Gaofeng
  • Miao, Hui
  • Wang, Yabin

Abstract

We construct a daily liquidity index of China’s government bond market using transaction data from the national interbank market over the past twenty years. The index is a composite of popular price-based and quantity-based metrics of liquidity. The composite indexes, obtained by averaging across different metrics or by applying principal component analysis, both point to a better liquidity condition after 2010. Market liquidity swings appear to be highly correlated with domestic funding liquidity and financial market volatility, but display less correlation to global macrofinancial indicators. Our findings suggest that further deepening of government bond market would support domestic financial stability and monetary operations down the road.

Suggested Citation

  • Han, Gaofeng & Miao, Hui & Wang, Yabin, 2020. "Liquidity of China’s Government Bond Market: Measures and Driving Forces," MPRA Paper 104545, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:104545
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    References listed on IDEAS

    as
    1. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
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    3. Stacey Anderson & Stéphane Lavoie, 2004. "The Evolution of Liquidity in the Market for Government of Canada Bonds," Bank of Canada Review, Bank of Canada, vol. 2004(Summer), pages 19-31.
    4. Tobias Adrian & Michael J. Fleming & Erik Vogt, 2017. "The Evolution of Treasury Market Liquidity: Evidence from 30 Years of Limit Order Book Data," Staff Reports 827, Federal Reserve Bank of New York.
    5. Ms. Zsofia Arvai & Mr. Geoffrey M Heenan, 2008. "A Framework for Developing Secondary Markets for Government Securities," IMF Working Papers 2008/174, International Monetary Fund.
    6. Ricardo Hoyos & Yang Liu & Hui Miao & Christian Saborowski, 2020. "Who Drains Bond Market Liquidity in an Emerging Market?," IMF Working Papers 2020/141, International Monetary Fund.
    7. Robert McCauley & Eli Remolona, 2000. "Size and liquidity of government bond markets," BIS Quarterly Review, Bank for International Settlements, November.
    8. Allaudeen Hameed & Jean Helwege & Ran Li & Frank Packer, 2019. "Measuring corporate bond liquidity in emerging market economies: price- vs quantity-based measures," BIS Papers chapters, in: Bank for International Settlements (ed.), Asia-Pacific fixed income markets: evolving structure, participation and pricing, volume 102, pages 45-62, Bank for International Settlements.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Government bond; Bond liquidity; Principal component analysis; Regime switching model;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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