Comments on "Measuring corporate bond liquidity in emerging markets: price- vs quantity-based measures"

Dragon Yongjun Tang

A chapter in Asia-Pacific fixed income markets: evolving structure, participation and pricing, 2019, vol. 102, pp 63-66 from Bank for International Settlements

Abstract: The authors of this paper (Hameed, Helwege, Li and Packer) examine the liquidity of corporate bonds in emerging market economies (EMEs). Their main goal is to identify the most effective measures of corporate bond liquidity in EMEs. Six quantity-based (eg turnover) and six price-based (eg the absolute return over volume ratio or the Amihud measure) measures are studied. Analysing a large sample of corporate bonds from Malaysia during the period 1997–2017 with transactions recorded on an electronic trading platform, the authors find that quantity-based measures are more effective in capturing bond liquidity differences than price-based measures. Their findings are the same for both Islamic and conventional bonds. Overall, the bonds under study are considerably illiquid. Establishing ways to accurately measure bond liquidity is of interest to traders and policy makers. Bond market makers may demand premiums for liquidity provisions. If liquidity is not measured correctly, market makers will be less able to support the proper functioning of the bond market. Policy makers are also keen to gauge the current liquidity status of the bond market so as to effectively intervene, when necessary, to improve financial conditions and thus benefit society in general. For example, in recent years, central banks worldwide have begun engineering bond purchase programmes to improve bond market liquidity and corporate finance (eg the European Central Bank initiated the corporate sector purchase programme in June 2016). This paper contributes to the literature by providing evidence showing that quantity-based measures are more appropriate than price-based measures in capturing bond liquidity differences in EMEs. Moreover, it sheds light on the development of the corporate bond market in EMEs. Despite its great potential, the Islamic bond market has not grown much. New issuances have been fluctuating at around $80 billion per year (see Table 1). A potential cause of the stagnation of the market is lack of liquidity. Given that the majority of the sample bonds are Islamic bonds, this study makes a useful contribution to our understanding of the Islamic bond market.

Date: 2019
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