A DEEP MARKET IN ISRAELI CORPORATE BONDS: MACRO AND MICROECONOMIC ANALYSIS IN LIGHT OF THE ACCOUNTING STANDARDS

Gitit Gur Gershgoren, Elroi Hadad and Haim Kedar-Levy

Israel Economic Review, 2020, vol. 18, issue 1, 139-176

Abstract: This article examines the question of whether a “deep market” for tradable corporate bonds exists in Israel, as defined in the international accounting standard (IAS-19) dealing with discounting long-term post-retirement obligations. The analysis was carried out with regard to two aspects of the term “deep market”: the macroeconomic aspect, which relates to the financial system's ability to provide liquidity (lines of credit) to the nonfinancial sector, and the microeconomic aspect, which relates to the size of liquidity premium in the Israeli corporate bond market. An out-of-sample examination of Israel, based on the macroeconomic analysis, indicates a probability of over 95 percent that Israel belongs to the group of countries with deep markets. The microeconomic analysis was carried out based on corporate-bond daily trading data from the beginning of 2004 to the beginning of 2014, categorized by CPIindexation sector and rating. The assessment results suggest that the liquidity premium for CPI-indexed corporate bonds rated AA- and above is similar to the premium measured for investment-grade corporate bonds in the US. It is worth stressing that the analysis shown in this paper did not include the coronavirus episode. It might be that the dynamics governing the markets during and after the coronavirus episode are different, implying rules that are not part of the present research. Analyzing the data during the coronavirus episode is an interesting direction for future research.

Date: 2020
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