Central Exchanges for Government Bonds? Evidence during COVID-19

40 Pages Posted: 20 Jul 2021 Last revised: 20 Sep 2021

See all articles by Ari Kutai

Ari Kutai

Bank of Israel - Research Department

Daniel Nathan

Bank of Israel; Tel Aviv University - Coller School of Management

Milena Wittwer

European University Institute; Stanford University; Boston College

Date Written: July 8, 2021

Abstract

In March 2020, government bond markets experienced severe illiquidity. Since then, regulators debate market reforms. One way to enhance liquidity could be to let government bonds, like stocks, be traded on central exchanges. We assess this reform with price data of the U.S, U.K., German, Japanese, and Israeli government bond and stock markets. We leverage a unique institutional feature of the Israeli government bond market---that it already operates on an exchange---to test whether and by how much having an exchange affected bid-ask spreads in March 2020 via difference-in-difference analyses. Our findings suggest that spreads in government bond markets without exchanges would have been 30%-60% lower if there had been an exchange. This implies higher liquidity and provides support in favor of the market reform.

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

JEL Classification: G00, G01, G14, G15, G18, G23, G28

Suggested Citation

Kutai, Ari and Nathan, Daniel and Wittwer, Milena and Wittwer, Milena, Central Exchanges for Government Bonds? Evidence during COVID-19 (July 8, 2021). 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

Daniel Nathan (Contact Author)

Bank of Israel ( email )

P.O. Box 780
Jerusalem, 91907
Israel

Tel Aviv University - Coller School of Management ( email )

Tel Aviv
Israel

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

Do you want regular updates from SSRN on Twitter?

Paper statistics

Downloads
138
Abstract Views
1,043
rank
282,462
PlumX Metrics