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

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