Measuring Changes in Liquidity Using the Bid-Offer Price Proxy: Determinants of Liquidity in the United Kingdom Gilt Market

International Journal of Finance and Policy Analysis Volume 3, Number 1: Spring 2011

40 Pages Posted: 16 Sep 2019

See all articles by Moorad Choudhry

Moorad Choudhry

London Metropolitan University; University of Kent Business School

Date Written: Spring 2011

Abstract

Financial market liquidity is an important yardstick of value for investors and central monetary authorities. Secondary market liquidity itself cannot be observed directly and is instead measured using a number of different proxies. The most common proxy is the asset bid-off price spread. In this study we conduct time series analysis of the bid-offer spread in order to ascertain if the level of liquidity in a specified market has improved over a period of time. The market we select is the United Kingdom government bond market or gilt market. During the 1990s the UK monetary authorities introduced a number of structural reforms in the gilt market, designed to improve secondary market liquidity. We measure the success of the reforms by attempting to determine if liquidity levels improved in the post-reform period, via the examination of the bid-offer spread. We examine the determinants of this proxy measure, and estimate which of the explanatory variables carries the greatest weight in influencing liquidity levels. We conclude that a number of the independent variables that we examined, including bond issue size and maturity, are found to be significant determinants of liquidity. We conclude further that similar structural reforms should be considered by other central monetary authorities wishing to improve bond market liquidity levels, and that the determinant factors we cite should be reviewed during periods of market correction, when liquidity levels decrease.

Keywords: financial markets, government bonds, liquidity, bid-offer spread, risk-free yield, repo, strips

JEL Classification: G14, G15

Suggested Citation

Choudhry, Moorad and Choudhry, Moorad, Measuring Changes in Liquidity Using the Bid-Offer Price Proxy: Determinants of Liquidity in the United Kingdom Gilt Market (Spring 2011). International Journal of Finance and Policy Analysis Volume 3, Number 1: Spring 2011, Available at SSRN: https://ssrn.com/abstract=3447753 or http://dx.doi.org/10.2139/ssrn.3447753

Moorad Choudhry (Contact Author)

University of Kent Business School ( email )

Canterbury, Kent CT2 7PE
United Kingdom

London Metropolitan University ( email )

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
14
Abstract Views
215
PlumX Metrics