Central Exchanges for Government Bonds? Evidence during COVID-19
40 Pages Posted: 20 Jul 2021 Last revised: 20 Sep 2021
Date Written: July 8, 2021
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: Suggested Citation