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Benchmarking liquidity proxies: The case of EU sovereign bonds

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  • Langedijk, Sven
  • Monokroussos, George
  • Papanagiotou, Evangelia

Abstract

We examine effective measures of liquidity in the context of EU sovereign bonds and the Basel III regulatory framework. We observe that the empirical correlations between benchmarks and proxies are typically very low and in general become weaker as the frequency over which these relationships are examined becomes higher, and that the relative strength of the various proxies may change with the frequency considered. The main implications of our results for the EU sovereign bond market are (i) the use of liquidity proxies may lead to erroneous conclusions; (ii) any liquidity measure needs to be assessed against the relevant timeframe for conversion into cash; and (iii) the end-of-day spread is the best performing proxy across different frequencies.

Suggested Citation

  • Langedijk, Sven & Monokroussos, George & Papanagiotou, Evangelia, 2018. "Benchmarking liquidity proxies: The case of EU sovereign bonds," International Review of Economics & Finance, Elsevier, vol. 56(C), pages 321-329.
    • Handle: RePEc:eee:reveco:v:56:y:2018:i:c:p:321-329
    DOI: 10.1016/j.iref.2017.11.002
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    References listed on IDEAS

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    1. repec:ecb:ecbwps:20111426 is not listed on IDEAS
    2. Langedijk, Sven & Monokroussos, George & Papanagiotou, Evangelia, 2015. "Benchmarking Liquidity Proxies: Accounting for Dynamics and Frequency Issues," MPRA Paper 61865, University Library of Munich, Germany.
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    7. Kingsley Y. L. Fong & Craig W. Holden & Charles A. Trzcinka, 2017. "What Are the Best Liquidity Proxies for Global Research?," Review of Finance, European Finance Association, vol. 21(4), pages 1355-1401.
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    Cited by:

    1. Emre Su & Kaya Tokmakçıoğlu, 2023. "Determinants of bid-ask spread in emerging sovereign bond markets," Journal of Asset Management, Palgrave Macmillan, vol. 24(5), pages 346-352, September.
    2. Díaz, Antonio & Escribano, Ana, 2020. "Measuring the multi-faceted dimension of liquidity in financial markets: A literature review," Research in International Business and Finance, Elsevier, vol. 51(C).
    3. Kang-Soek Lee, 2020. "Macroprudential stress testing: A proposal for the Luxembourg investment fund sector," BCL working papers 141, Central Bank of Luxembourg.
    4. Richter, Thomas Julian, 2022. "Liquidity commonality in sovereign bond markets," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 501-518.
    5. Hamill, Philip A. & Li, Youwei & Pantelous, Athanasios A. & Vigne, Samuel A. & Waterworth, James, 2021. "Was a deterioration in ‘connectedness’ a leading indicator of the European sovereign debt crisis?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 74(C).

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    More about this item

    Keywords

    Liquidity; Market microstructure; High-frequency data; Sovereign bonds; LCR; C58; G12; G28;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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