Who Improves or Worsens Liquidity in the Korean Treasury Bond Market?

60 Pages Posted: 31 Jan 2018

See all articles by Jieun Lee

Jieun Lee

The Bank of Korea; Bank of Korea - Economic Research Institute

Date Written: February 1, 2018

Abstract

This study analyzes how heterogenous institutional investors affect Korean Treasury bond liquidity in the over-the-counter (OTC) market using a unique individual bond-level data set over the period from January 2007 to December 2016. We find that bonds with higher foreign bond holding have a greater price impact of trades and lower trading activities, all indicating lower liquidity. The liquidity-reducing effects of foreign investors are stronger for off-the-runs than on-the-runs and for the post-crisis period (2010-2016) than the crisis period (2007-2009). In contrast, bond holdings by domestic financial investment companies contribute to enhancing liquidity. Furthermore, the effect of bond holdings by domestic banks, insurance companies and pension funds on liquidity varies with issuance maturities.

Keywords: Foreign investors, Institutional investors, Price impact, Investor heterogeneity, Treasury bond liquidity

JEL Classification: G10, G32, G34

Suggested Citation

Lee, Jieun, Who Improves or Worsens Liquidity in the Korean Treasury Bond Market? (February 1, 2018). Bank of Korea WP 2018-3. Available at SSRN: https://ssrn.com/abstract=3115806 or http://dx.doi.org/10.2139/ssrn.3115806

Jieun Lee (Contact Author)

The Bank of Korea ( email )

110 3-Ga Namdaemunno Jung-Gu
Seoul 100-794, 100-794
Korea Republic of (South Korea)
82-2-759-5470 (Phone)

Bank of Korea - Economic Research Institute ( email )

110 3-Ga Namdaemunno Jung-Gu
Seoul 100-794
Korea Republic of (South Korea)

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