De Jure Benchmark Bonds

Abstract

Benchmark bonds help to improve market efficiency. They seem to arise spontaneously in deep and liquid markets. Can governments help to create them where markets are too small? This paper examines three emerging markets in Asia where authorities have tried: they have designated specific bonds as benchmarks and fostered their liquidity. We identify exactly which bonds were the designated benchmarks. We then propose rank-order measures of liquidity and determine the extent to which these de jure benchmarks end up as de facto benchmarks in the sense of being the most liquid bonds in their maturity segments. We find that this occurs in close to 60% of months in our sample, covering a range of maturities for Indonesia, Malaysia and Thailand. We identify three factors that make success more likely: (a) choosing already liquid bonds; (b) choosing bonds that have previously served as de jure benchmarks; and (c) choosing bonds that will be issued during the month.

Keywords: benchmark bond, price discovery, market liquidity, informational public good, recycling, de jure, de facto, wannabe benchmark, probit model, inverse Mills ratio

JEL Classification: G10, G12, G14