Sovereign issuers, incentives and liquidity: The case of the Danish sovereign bond market

Alexander Eisl, Christian Ochs, Jonas Staghøj and Marti G. Subrahmanyam

Journal of Banking & Finance, 2022, vol. 140, issue C

Abstract: The Sovereign Debt Management Office of the Kingdom of Denmark decided in 2017 to pay direct compensation to certain financial intermediaries for providing liquidity in its sovereign bond market. We analyze the extent to which market liquidity and liquidity premia in the Danish sovereign bond market changed in response to this new market design and, in particular, the compensation offered to liquidity providers. We also investigate whether the new compensation scheme for market makers is cost-efficient for the Kingdom of Denmark through lower bond liquidity premia, bond yields and debt service costs. We find that improvements in market liquidity conditions lead to potential savings, net of costs, for the Kingdom of Denmark of DKK 23.12 million over the lifetime of the bonds issued every year as a direct benefit, and to a decrease in interest expenses for the real economy of about 0.07% of nominal GDP as one indirect benefit. From these findings, we derive policy recommendations for the Kingdom of Denmark, as well as other European countries that currently generally employ an indirect rather than a direct compensation scheme.

Keywords: Market liquidity; Sovereign bond markets; Dealer incentives (search for similar items in EconPapers)
JEL-codes: G12 G15 G18 G23 H63 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:140:y:2022:i:c:s037842662200084x

DOI: 10.1016/j.jbankfin.2022.106485

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