Liquidity premia in German government bonds

Jacob W. Ejsing () and Jukka Sihvonen ()
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Jacob W. Ejsing: European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany., http://www.ecb.europa.eu/home/html/index.en.html
Jukka Sihvonen: Department of Accounting and Finance, University of Vaasa, P.O. Box 700, 65101 Vaasa, Finland., http://www.uwasa.fi/

No 1081, Working Paper Series from European Central Bank

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.

Keywords: Government bond; liquidity; liquidity premium; futures market. (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec
Date: 2009-08

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