Measuring liquidity of Spanish debt

María Isabel Cambón Murcia, José Luis Cano Coello and Jesús González Redondo

CNMV Working Papers from CNMV- Spanish Securities Markets Commission - Research and Statistics Department

Abstract: Assessing liquidity in fixed-income markets is becoming very important in the current context of extremely low interest rates which, in general terms, is encouraging the acquisition of riskier and (potentially) less liquid assets. Although there is the perception that bond market liquidity could have worsened over the last years in international markets, none of the current studies has reached a clear conclusion. In this paper, we propose a liquidity synthetic indicator (LSI) on Spanish debt, applying the methodology that Broto and Lamas (2016) used for US markets. We compute six individual liquidity indicators that represent the elements that characterise a liquid market (tightness, resilience, depth and breadth). We use price and transaction-based indicators for government and corporate debt when data is available for the period 2005-2016. Our LSI shows several episodes of significant worsening in liquidity conditions, related to the Lehman Brothers’ collapse and the European sovereign debt crisis. After a sizeable improvement of liquidity in 2013-2014, the liquidity indicator has deteriorated over the past months as a consequence of lower trading volumes. The current ultralow interest rate environment and more capital demanding regulations could partially explain these results.

Keywords: liquidity measures; synthetic indicator; Spanish fixed-income market. (search for similar items in EconPapers)
JEL-codes: C43 G01 G10 G15 (search for similar items in EconPapers)
Date: 2017
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