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J-liquidity Measure: the Term Structure of the Liquidity Premium and the Decomposition of the Municipal Bond Spread

Author

Listed:
  • Takahiro Hattori

    (Policy Research Institute, Ministry of Finance)

Abstract

We interpret the yield spread between government-guaranteed bonds and government bonds as market liquidity, and use this measure to decompose the municipal bond spread into credit and liquidity premiums in the Japanese market. Our model-free approach not only provides the term structure of the liquidity premium, but also captures the impact of illiquidity events and the illiquidity condition of the fixed-income market. The liquidity factor plays an important role in the municipal bond spread, which suggests local governments have the opportunity to reduce their financing costs through enhancing market liquidity. The liquidity measure is provided publically for future applications.

Suggested Citation

  • Takahiro Hattori, 2017. "J-liquidity Measure: the Term Structure of the Liquidity Premium and the Decomposition of the Municipal Bond Spread," Discussion papers ron290, Policy Research Institute, Ministry of Finance Japan.
    • Handle: RePEc:mof:wpaper:ron290
    as

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    File URL: https://warp.ndl.go.jp/info:ndljp/pid/12213409/www.mof.go.jp/pri/research/discussion_paper/ron290.pdf
    File Function: First version, 2016
    Download Restriction: no
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    More about this item

    Keywords

    bond liquidity; liquidity risk; term structure of liquidity premium; municipal bond market;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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