Who Drains Bond Market Liquidity in an Emerging Market?

Who Drains Bond Market Liquidity in an Emerging Market?
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Volume/Issue: Volume 2020 Issue 141
Publication date: July 2020
ISBN: 9781513550824
$18.00
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Topics covered in this book

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Finance , Investments and Securities-General , WP , bond market liquidity , liquidity index , liquidity indicator , liquidity depletion , liquidity shortage , liquidity stress , Liquidity , Securities markets , Liquidity management , Securities , Sovereign bonds , Global , , benchmark securities

Summary

This paper examines the drivers of liquidity shortages in the Mexican government bond market. We use unique transaction- and quote level data with information on end-investors to construct an index of bond market liquidity. We find that liquidity remained stable in recent years, although temporary shortages arose amid domestic and global market stress. The analysis suggests that the largest liquidity squeezes have tended to be driven by foreign investors, whose sell-offs were especially pronounced in less liquid market segments. While domestic banks often absorbed part of the shock, other domestic investors—with the notable inclusion of domestic pension and mutual funds—appeared to take a more opportunistic stance depending on the nature of the shock.