Lighting up the Dark: Liquidity in the German Corporate Bond Market

Abstract

We study the impact of transparency on liquidity in OTC markets. We do so by providing an analysis of liquidity in a corporate bond market without trade transparency (Germany), and comparing our findings to a market with full post-trade disclosure (the U.S.). We employ a unique regulatory dataset of transactions of German financial institutions from 2008 until 2014 to find that: First, overall trading activity is much lower in the German market than in the U.S. Second, similar to the U.S., the determinants of German corporate bond liquidity are in line with search theories of OTC markets. Third, surprisingly, frequently traded German bonds have transaction costs that are 39-61 bp lower than a matched sample of bonds in the U.S. Our results support the notion that, while market liquidity is generally higher in transparent markets, a subset of bonds could be more liquid in more opaque markets because of investors "crowding" their demand into a small number of more actively traded securities.

Tunisian corporate bond market liquidity: a qualitative approach

“…In the OTC market, trade occurs bilaterally between dealers and their customers; such trading is costly, which leads to a wider spread and decreased market liquidity. These findings are consistent with Paiardini (2015), Harris et al (2015) and Gunduz et al (2018). Moreover, lack of transparency in the corporate bond market leads to considerable transaction costs (Goldstein et al, 2007;Bessembinder and Maxwell, 2008).…”

“…In (Aquilina and Suntheim, 2017), and South Korea displays similar statistics (Gyntelberg et al, 2005). Likewise, the European corporate bond market is mainly an OTC market (Gunduz et al, 2018). The literature related to the effect of trade transparency on market liquidity is inconclusive.…”

“…In most economies, where corporate bonds are actively traded on the OTC market, the central market plays a marginal role in providing liquidity; around 90% of UK corporate bonds are traded on the OTC market (Aquilina and Suntheim, 2017), and South Korea displays similar statistics (Gyntelberg et al , 2005). Likewise, the European corporate bond market is mainly an OTC market (Gunduz et al , 2018).…”

Capital Regulation, Market-Making, and Liquidity

“…In order to evaluate whether potential changes in banks' market-making activities impact the overall liquidity of bond markets, we need to define quantitative estimates of bond market liquidity over time. We employ liquidity measures calculated using transactions data at a weekly frequency (see Gündüz et al (2018) for a similar approach). This allows us to include bonds that are typically not traded daily.…”

Liquidity in Asian Financial Markets: Crowding Out or Spillover Effect

“…With regards to the bond market, the extant literature has analyzed the determinants of bond market development, but most of the work has focused on the size or capitalization of the market (Bhattacharyay, 2013;Eichengreen and Luengnaruemitchai, 2011;Maurya and Mishra, 2016;Mu et al, 2013;Smaoui et al, 2017;Teplova and Sokolova, 2018), and only a few studies examine the liquidity aspect of the bond market. Goyenko et al (2011) and Gündüz et al (2018) explore the factors that influence liquidity in the bond markets, while Lin et al (2011) study the impact of liquidity on corporate bond returns. Further, the literature exploring the interlinkages of liquidity between the bond market and the stock market is almost missing as per our knowledge.…”