The Liquidity of Dual-Listed Corporate Bonds. Empirical Evidence from Italian Markets

Abstract

We compute some indicators (zero-trade, turnover ratio, Amihud price impact, and Roll bid-ask spread) to examine the liquidity conditions of corporate bonds traded on the main Italian retail bond markets from January 2010 to June 2013. In order to compare market liquidity for identical securities, our analysis focuses on fragmented bonds, i.e. bonds traded concurrently on two different venues: either DomesticMOT and EuroTLX, or ExtraMOT and EuroTLX. As for bonds traded on DomesticMOT and EuroTLX, the Amihud and the Roll statistics suggest EuroTLX being more liquid. Moreover, irrespective of the trading venue, on average bank bonds are less liquid than bonds issued by non-financial companies, especially from 2011 due to the impact of the sovereign debt crisis. With regard to bonds traded across ExtraMOT and EuroTLX, the latter is characterized by better liquidity conditions, with bank bonds being more liquid than non-financial ones. Furthermore, we find evidence of better liquidity figures for Italian bonds (nationality), structured bonds (complexity), and securities with greater minimum trading size (MTS). We also find that bonds' features (issuers' nationality and industry; bonds' residual maturity, complexity, rating, etc…) affect liquidity differently depending upon the trading venue, thus supporting the view that market microstructure may play a relevant role. Finally, we investigate the effect of fragmentation by comparing the liquidity of dual-listed bank bonds fragmented across DomesticMOT and EuroTLX with otherwise similar bank bonds traded exclusively on DomesticMOT. Italian fragmented bank bonds turn out to be slightly more liquid than similar Italian bonds traded exclusively on DomesticMOT; whereas, the opposite holds for foreign bank bonds. However, overall there is not a clear-cut evidence on the effect of fragmentation on bond liquidity, probably because it is intertwined with bonds' attributes, such as the issue size (in our sample, higher for the Italian bank bonds).JEL Classification: G01, G10, G12, G18

Cross-impact and no-dynamic-arbitrage

“…MOT is the third-largest platform by traded value with 8.7% (8.8%) of traded value excluding the OTC market in 2014 (2015). Most of the literature for the Italian and European government bonds market focuses on MTS, with the exception of Linciano et al [2014] who compare the liquidity of dual-listed corporate bonds across MOT and the EuroTLX platform. Darbha and Dufour [2013] review the market microstructure of MTS in the context of the market for European sovereign bonds and discuss several liquidity measures based on the limit order book, trades or bond characteristics.…”

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

“…In fact, no statistics on trading volumes or liquidity measures are provided, since that is not their focus. Linciano, Fancello, Gentile, and Modena (2014) study the liquidity of Italian corporate bonds that are listed on two platforms contemporaneously (DomesticMOT or ExtraMOT and EuroTLX) and find a mixed impact of such fragmentation. Also, their analysis is restricted to these platforms and neglects the major market share of OTC voice trades, which form the majority of trades in corporate bond markets.…”

How Has Sovereign Bond Market Liquidity Changed? - An Illiquidity Spillover Analysis

“…For the European bond market most studies rely on data provided by MTS. A notable exception is Linciano et al (2014) that compares the liquidity of corporate bonds across three retail platforms. 6 Dufour et al (2004) give a description of the MTS data set and Cheung et al (2005) study the microstructure and market order flow of MTS using trade-to-trade data from January 2001 to May 2002 and find that the domestic and EuroMTS platforms, despite their technical fragmentation, are closely connected in terms of liquidity.…”