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Liquidity premia in German government bonds

Author

Listed:
  • Ejsing, Jacob
  • Sihvonen, Jukka

Abstract

There is strong evidence that on-the-run U.S. Treasury securities trade much more liquidly and at significantly higher prices than their off-the-run counterparts. We examine if the same phenomenon is present in the German government bond market whose market structure differ markedly from that of the U.S. Treasury market. In sharp contrast to the U.S. evidence, we find that on-the-run status has only a negligible effect on the liquidity and pricing once other factors have been controlled for. Instead, the highly liquid German bond futures market, whose turnover is many times larger than in the cash market, leads to significant liquidity spillovers. Specifically, we find that bonds which are deliverable into futures contracts are both trading more liquidly and commanding a significant price premium, and that this effect became more pronounced during the recent financial crisis. JEL Classification: E43, G12, H63

Suggested Citation

  • Ejsing, Jacob & Sihvonen, Jukka, 2009. "Liquidity premia in German government bonds," Working Paper Series 1081, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20091081
    Note: 807173
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1081.pdf
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    More about this item

    Keywords

    futures market; government bond; liquidity; liquidity premium;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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