Key Determinants of Liquidity in the Thai Bond Market

Akkharaphol Chabchitrchaidol and Sakkapop Panyanukul
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Akkharaphol Chabchitrchaidol: Bank of Thailand
Sakkapop Panyanukul: Bank of Thailand

No 2005-05, Working Papers from Monetary Policy Group, Bank of Thailand

Abstract: The Thai bond market has seen significant growth in the years following the Asian financial crisis in 1997. Authorities have recognized the importance and the need for deep and liquid bond markets and the role it plays in enhancing financial market resilience during times of stress. Markets for government securities also play an important role in providing a basis for a robust and efficient financial system as a whole. While steps have been taken to ensure that basic infrastructure in the bond market has been put in place, the lack of liquidity in the bond market has remained a major obstacle to market development. Not surprisingly, this lack of liquidity has made investors reluctant to trade bonds actively, with a large number of market players holding government bonds to maturity, in order not to incur daily mark-to-market losses. This paper identifies and analyzes the key determinants of liquidity in the Thai bond market, measured by bid-ask spreads on government bonds. We draw upon these determinants to find ways to improve liquidity in the secondary market. The paper attempts to determine what policy actions the government and central bank can take to ensure that these key determinants are achieved, providing recommendations for authorities’ role in creating an environment which best facilitates a liquid secondary market.

Pages: 47 pages
Date: 2005-08
References: View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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