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Measuring market liquidity in us fixed income markets: a new synthetic indicator

Author

Listed:
  • Carmen Broto

    () (Banco de España)

  • Matías Lamas

    () (Banco de España)

Abstract

We propose a new synthetic liquidity indicator that summarises the data on a broad set of market liquidity measures both for sovereign and corporate fixed income markets in the US. Our index is based on 17 variables that cover the main dimensions of market liquidity. The methodology used to calculate the index consists of two steps. First, a transformation of the individual liquidity measures is made, based on the methodology proposed by Holló et al. (2012) for the CISS (Composite Indicator of Systemic Stress). The transformed variables are then weighted using a principal component analysis. The indicator shows that liquidity in US fixed income markets has been impaired after the global financial crisis, mainly as a result of weaker liquidity conditions in US Treasury markets, whereas those in the corporate debt market remained stable.

Suggested Citation

  • Carmen Broto & Matías Lamas, 2016. "Measuring market liquidity in us fixed income markets: a new synthetic indicator," Working Papers 1608, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:1608
    as

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    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/16/Fich/dt1608e.pdf
    File Function: First version, April 2016
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    References listed on IDEAS

    as
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    3. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    4. Andrew J Swiston, 2008. "A U.S. Financial Conditions Index; Putting Credit Where Credit is Due," IMF Working Papers 08/161, International Monetary Fund.
    5. Antoine Bouveret & Peter Breuer & Yingyuan Chen & David Jones & Tsuyoshi Sasaki, 2015. "Fragilities in the U.S. Treasury Market; Lessons from the “Flash Rally” of October 15, 2014," IMF Working Papers 15/222, International Monetary Fund.
    6. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    7. Shane A. Corwin & Paul Schultz, 2012. "A Simple Way to Estimate Bid‐Ask Spreads from Daily High and Low Prices," Journal of Finance, American Finance Association, vol. 67(2), pages 719-760, April.
    8. Tobias Adrian & Michael J. Fleming & Or Shachar & Daniel Stackman & Erik Vogt, 2015. "Has Liquidity Risk in the Corporate Bond Market Increased?," Liberty Street Economics 20151006b, Federal Reserve Bank of New York.
    9. Ingo Fender & Ulf Lewrick, 2015. "Shifting tides - market liquidity and market-making in fixed income instruments," BIS Quarterly Review, Bank for International Settlements, March.
    10. Tobias Adrian & Michael J. Fleming & Daniel Stackman & Erik Vogt, 2015. "Has Liquidity Risk in the Treasury and Equity Markets Increased?," Liberty Street Economics 20151006a, Federal Reserve Bank of New York.
    11. Tonny Lybek & Abdourahmane Sarr, 2002. "Measuring Liquidity in Financial Markets," IMF Working Papers 02/232, International Monetary Fund.
    12. Kevin L. Kliesen & Michael T. Owyang & E. Katarina Vermann, 2012. "Disentangling diverse measures: a survey of financial stress indexes," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 369-398.
    13. Jack Bao & Jun Pan & Jiang Wang, 2011. "The Illiquidity of Corporate Bonds," Journal of Finance, American Finance Association, vol. 66(3), pages 911-946, June.
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    Citations

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    Cited by:

    1. 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).
    2. Broto, Carmen & Lamas, Matías, 2020. "Is market liquidity less resilient after the financial crisis? Evidence for US Treasuries," Economic Modelling, Elsevier, vol. 93(C), pages 217-229.
    3. María Isabel Cambón Murcia & José Luis Cano Coello & Jesús González Redondo, 2017. "Measuring liquidity of Spanish debt," CNMV Working Papers CNMV Working Papers no. 6, CNMV- Spanish Securities Markets Commission - Research and Statistics Department.

    More about this item

    Keywords

    market liquidity; synthetic index; principal component analysis; US fixed income markets.;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation

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