Liquidity Premia in German Government Bonds

61 Pages Posted: 24 Aug 2009

See all articles by Jacob Ejsing

Jacob Ejsing

European Central Bank (ECB)

Jukka Sihvonen

Aalto University

Date Written: August 21, 2009


There is strong evidence that on-the-run U.S. Treasury securities trade much more liquidly and at significantly higher prices than their off-the-run counterparts. We examine if the same phenomenon is present in the German government bond market whose market structure differ markedly from that of the U.S. Treasury market. In sharp contrast to the U.S. evidence, we find that on-the-run status has only a negligible effect on the liquidity and pricing once other factors have been controlled for. Instead, the highly liquid German bond futures market, whose turnover is many times larger than in the cash market, leads to significant liquidity spillovers. Specifically, we find that bonds which are deliverable into futures contracts are both trading more liquidly and commanding a significant price premium, and that this effect became more pronounced during the recent financial crisis.

Keywords: Government bond, liquidity, liquidity premium, futures market

JEL Classification: E43, G12, H63

Suggested Citation

Ejsing, Jacob and Sihvonen, Jukka, Liquidity Premia in German Government Bonds (August 21, 2009). ECB Working Paper No. 1081, Available at SSRN:

Jacob Ejsing (Contact Author)

European Central Bank (ECB) ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
00496913445312 (Phone)

Jukka Sihvonen

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101

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