Measuring Market Liquidity in US Fixed Income Markets: A New Synthetic Indicator

24 Pages Posted: 21 Apr 2016

Date Written: April 20, 2016

Abstract

We propose a new synthetic liquidity indicator that summarises the data on a broad set of market liquidity measures both for sovereign and corporate fixed income markets in the US. Our index is based on 17 variables that cover the main dimensions of market liquidity. The methodology used to calculate the index consists of two steps. First, a transformation of the individual liquidity measures is made, based on the methodology proposed by Holló et al. (2012) for the CISS (Composite Indicator of Systemic Stress). The transformed variables are then weighted using a principal component analysis. The indicator shows that liquidity in US fixed income markets has been impaired after the global financial crisis, mainly as a result of weaker liquidity conditions in US Treasury markets, whereas those in the corporate debt market remained stable.

Keywords: market liquidity, synthetic index, principal component analysis, US fixed income markets

JEL Classification: G10, G15, C43

Suggested Citation

Broto, Carmen and Lamas, Matias, Measuring Market Liquidity in US Fixed Income Markets: A New Synthetic Indicator (April 20, 2016). Banco de Espana Working Paper No. 1608. Available at SSRN: https://ssrn.com/abstract=2767371 or http://dx.doi.org/10.2139/ssrn.2767371

Carmen Broto (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Matias Lamas

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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