Exchanges for Government Bonds? Evidence during COVID-19

70 Pages Posted: 20 Jul 2021 Last revised: 30 Jul 2023

See all articles by Ari Kutai

Ari Kutai

Bank of Israel - Research Department; Tel Aviv University - Eitan Berglas School of Economics

Daniel Nathan

Bank of Israel; University of Pennsylvania - Finance Department

Milena Wittwer

European University Institute; Stanford University; Boston College

Date Written: June 13, 2022

Abstract

We leverage the unique institutional feature that the Israeli government bond market operates on an exchange rather than over-the-counter to analyze whether and why having an exchange affects market liquidity during a crisis. We document how the liquidity crisis in March 2020 affected the Israeli government bond market, and conduct difference-in-differences analyses, comparing bid-ask spreads in exchange markets (such as the Israeli government bond and U.S. future market) with markets lacking an exchange (like the U.S. government bond market). Our findings support the idea that having an exchange enhances market liquidity. A counterfactual analysis using trade data from the Israeli exchange suggests that this is due to the ability of investors to readily provide liquidity to one another and the efficient netting of trade flows on an exchange.

Keywords: Exchange, OTC markets, government bonds, liquidity, crisis

JEL Classification: D4, G1, G12, G14

Suggested Citation

Kutai, Ari and Nathan, Daniel and Wittwer, Milena and Wittwer, Milena, Exchanges for Government Bonds? Evidence during COVID-19 (June 13, 2022). Available at SSRN: https://ssrn.com/abstract=3882548 or http://dx.doi.org/10.2139/ssrn.3882548

Ari Kutai

Bank of Israel - Research Department ( email )

PO Box 780
Jerusalem 91007
Israel

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel

Daniel Nathan (Contact Author)

Bank of Israel ( email )

P.O. Box 780
Jerusalem, 91907
Israel

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Milena Wittwer

European University Institute ( email )

Villa Schifanoia
133 via Bocaccio
Firenze (Florence), Tuscany 50014
Italy

Stanford University ( email )

Stanford, CA 94305
United States

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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