Liquidity Factor in Ruble Bond Pricing

Liquidity is the second most significant characteristic of bonds following credit quality. According to trading data from 2017 to 2024 for secondary ruble-denominated local bonds, it has been revealed that in recent years, the overall liquidity of the Russian bond market has significantly increased. However, trading volumes remain at a negligible level compared to the nominal issue volumes. Relative trading volumes significantly decrease in the initial weeks of trading, by 66% in the second week relative to the first week and by 36% in the third week relative to the second week. Then throughout the life of the bonds, these volumes do not recover. Additionally, the impact of the issuer’s creditworthiness on liquidity is taken into consideration. It has been established that the most accurate predictor of the bid-ask spread (BAS) is the number of transactions. In this respect, the riskiest securities have a more liquid bid-ask spread, due to the retail nature of bondholders. The paper examines various measures of liquidity, based on which a proprietary measure is proposed — the adjusted bid-ask spread (ABAS). This measure takes into account the size of the transaction, the size of the issue, and the volume and frequency of secondary transactions in the analyzed security. ABAS, when applied to transactions of 1 million rubles or more, reduces the proportion of securities with a bid-ask spread below 20 basis points in the sample from 39 to 24%, while increasing the proportion of those with a spread above 200 basis points from 5 to 22%. Although the article reveals a counterintuitive effect of liquidity parameters on bond prices, their contribution to the final spread is negligible. Meanwhile the level of illiquidity significantly influences price dynamics: lower liquidity leads to greater volatility in secondary market prices, and negatively affects the financial outcome of the deal through the transaction cost channel.