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Market Liquidity and Bond Prices in a Small Open Economy

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  • James Brugler

Abstract

Investors may apply a liquidity premium to assets that are easy and cheap to trade, especially in times of stress. This paper tests for a causal relationship from market liquidity to prices in the government bond market for a small open economy (Australia). To identify this effect, I use a source of exogenous variation in liquidity that is driven by whether a particular bond is used to compute settlement prices for Australian interest rate futures contracts (“basket status”). Despite a strong link between basket status and market liquidity, I do not find clear evidence that higher market liquidity affects Australian government bond prices.

Suggested Citation

  • James Brugler, 2026. "Market Liquidity and Bond Prices in a Small Open Economy," The Financial Review, Eastern Finance Association, vol. 61(3), pages 965-977, August.
    • Handle: RePEc:bla:finrev:v:61:y:2026:i:3:p:965-977
    DOI: 10.1111/fire.70047
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