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Liquidity Issues in Indian Sovereign Bond Market

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  • Nath, Golaka

Abstract

Liquidity is one of the most important factors after credit risk that affects the bond yields. The paper uses various measures of liquidity to understand their determinants in Indian sovereign bond market. The Liquidity measured by parameters like Turnover Ratio and Amihud Illiquidity Indicator show that these parameters not only have instantaneous relationship with bond yield but contemporaneous relationship with themselves. Impact Cost is not found to have any explanatory power. Financial crisis had marginal impact on the Indian sovereign bond market. It functioned well during the crisis period without much deterioration in general market liquidity condition as RBI injected large amount of liquidity to the system within a limited time period to ensure stability in the financial markets in India. However, the notion of flight to safety was evident as traders started investing largely in Government bonds shunning credit products as the credit quality in general started to dip. This was duly supported by large issuances of Government bonds. The study also finds that the electronic order matching system for government bonds has been successful in improving liquidity and reducing volatility in the market.

Suggested Citation

  • Nath, Golaka, 2013. "Liquidity Issues in Indian Sovereign Bond Market," MPRA Paper 51633, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:51633
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    File URL: https://mpra.ub.uni-muenchen.de/51633/1/MPRA_paper_51633.pdf
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    References listed on IDEAS

    as
    1. Ben S. Bernanke & Cara S. Lown, 1991. "The Credit Crunch," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 205-248.
    2. Rüffer, Rasmus & Stracca, Livio, 2006. "What is global excess liquidity, and does it matter?," Working Paper Series 696, European Central Bank.
    3. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    4. Jeffery D Amato & Eli M Remolona, 2003. "The credit spread puzzle," BIS Quarterly Review, Bank for International Settlements, December.
    5. Amihud, Yakov & Mendelson, Haim, 1987. "Trading Mechanisms and Stock Returns: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 42(3), pages 533-553, July.
    6. repec:bla:jfinan:v:53:y:1998:i:6:p:2225-2241 is not listed on IDEAS
    7. M S Mohanty, 2002. "Improving liquidity in government bond markets: what can be done?," BIS Papers chapters, in: Bank for International Settlements (ed.), The development of bond markets in emerging economies, volume 11, pages 49-80, Bank for International Settlements.
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    Cited by:

    1. Endo, Tadashi, 2022. "Endogenous market development for government securities in lower-income economies," Emerging Markets Review, Elsevier, vol. 50(C).
    2. Ajit Dayanandan & Jai Chander & N. R. V. V. M. K. Rajendra Kumar, 2023. "Size and liquidity of government securities in India," Indian Economic Review, Springer, vol. 58(1), pages 71-90, June.
    3. Michael J. Fleming & Seema Saggar & Samita Sareen, 2016. "Trading activity in the Indian government bond market," Staff Reports 785, Federal Reserve Bank of New York.

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    More about this item

    Keywords

    liquidity; liquidity premium; bond yield; Indian Sovereign Bonds; Impact Cost; Turnover Ratio; NDS-OM; Liquidity Adjustment Facility;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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