The Value of Introducing Structural Reform to Improve Bond Market Liquidity: Experience from the U.K. Gilt Market

European Journal of Finance and Banking Research, Vol. 2, No. 2, 2009

23 Pages Posted: 19 Jan 2010

See all articles by Moorad Choudhry

Moorad Choudhry

University of Kent Business School; London Metropolitan University

Date Written: July 15, 2009

Abstract

The importance of maintaining sufficient liquidity in financial markets is emphasised strongly in the academic literature. During the 1990s the United Kingdom monetary authorities introduced a number of structural reforms in the government bond market, aimed at improving secondary market liquidity. In this paper we examine the impact of the reforms by attempting to ascertain if liquidity levels improved in the post-reform period. We estimate the change in liquidity levels through the use of a proxy measure of liquidity, namely the benchmark bond theoretical versus market yield error. We examine the determinants of the proxy measure of market liquidity, and estimate which of the explanatory variables carries the greatest weight in influencing liquidity levels. We identify those factors that contributed most to maintaining secondary market liquidity and thereby draw conclusions of potential value to sovereign bond market monetary authorities.

Keywords: financial markets, bonds, market liquidity, proxy measure

JEL Classification: G11, G12, G32

Suggested Citation

Choudhry, Moorad and Choudhry, Moorad, The Value of Introducing Structural Reform to Improve Bond Market Liquidity: Experience from the U.K. Gilt Market (July 15, 2009). European Journal of Finance and Banking Research, Vol. 2, No. 2, 2009, Available at SSRN: https://ssrn.com/abstract=1536087

Moorad Choudhry (Contact Author)

London Metropolitan University ( email )

166-220 Holloway Road
London EC3N 2EY, N7 8HN
United Kingdom

University of Kent Business School ( email )

Canterbury, Kent CT2 7PE
United Kingdom

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