Liquidity in the UK Corporate Bond Market: Evidence from Trade Data

Posted: 9 Mar 2017 Last revised: 5 Apr 2017

See all articles by Matteo Aquilina

Matteo Aquilina

Financial Conduct Authority

Felix Suntheim

International Monetary Fund (IMF) - Monetary and Capital Markets Department

Date Written: June 2, 2016

Abstract

We present evidence on the evolution of liquidity in the UK corporate bond market for the period 2008–2014. On the basis of a series of widely accepted liquidity measures, we document that there is no evidence that liquidity outcomes have deteriorated in the market, despite the decline in inventory of dealers in this period. If anything, the market appears to have become more liquid in recent years. We also document that there is little evidence that liquidity is having a larger effect on bond spreads now than a few years ago. We do not find evidence that liquidity has become more ‘flighty’ in response to shocks of a mild to moderate nature, as measures of liquidity risk do not increase over the period of analysis. However, we do not claim that there are no risks associated with liquidity. Our own analysis shows that liquidity is subject to considerable deterioration if the market is under severe stress; there was considerably less liquidity in 2009/10 than either before or after this period.

Keywords: Corporate bonds, Liquidity

JEL Classification: G12, G18

Suggested Citation

Aquilina, Matteo and Suntheim, Felix, Liquidity in the UK Corporate Bond Market: Evidence from Trade Data (June 2, 2016). FCA Occasional Paper No. 14. Available at SSRN: https://ssrn.com/abstract=2788728 or http://dx.doi.org/10.2139/ssrn.2788728

Matteo Aquilina

Financial Conduct Authority ( email )

25 The North Colonnade
Canary Wharf
London, E14 5HS
United Kingdom

Felix Suntheim (Contact Author)

International Monetary Fund (IMF) - Monetary and Capital Markets Department ( email )

United States

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