An Empirical Analysis of Liquidity and Order Flow in the Brokered Interdealer Market for Government of Canada Bonds
AbstractThe authors empirically measure Canadian bond market liquidity using a number of indicators proposed in the literature and detail, for the first time, price and trade dynamics in the Government of Canada secondary bond market. They find, consistent with Inoue (1999), that the Canadian brokered interdealer fixed-income market is relatively liquid for its size. Liquidity measures are analyzed relative to each other and across securities, and intraday patterns are identified. The authors' results show that trading activity is positively correlated with price volatility, and that signed order flow is significant in explaining contemporaneous high-frequency price movements. They find evidence that trading activity is positively related to liquidity measures in some markets, which suggests that indicators such as trade frequency and trading volume, despite certain drawbacks, can be seen as useful proxies for liquidity. The authors also document Canadian participants' prevalent use of an order expansion protocol, whereby order size can be negotiated upward once a trade has been initiated; although Boni and Leach (2002) identify this practice as consistent with a market where there is relatively strong concern regarding information asymmetry, the authors observe no consistent link between the frequency of its use and observations of trading activity, market liquidity, or price volatility.
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 03-28.
Length: 52 pages
Date of creation: 2003
Date of revision:
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Financial markets; Market structure and pricing;
Find related papers by JEL classification:
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
This paper has been announced in the following NEP Reports:
- NEP-CFN-2003-09-28 (Corporate Finance)
- NEP-FMK-2003-09-28 (Financial Markets)
- NEP-RMG-2003-09-28 (Risk Management)
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