Dollar and Government Bond Liquidity: Evidence from Korea

72 Pages Posted: 15 Nov 2023 Last revised: 21 Nov 2023

See all articles by Jieun Lee

Jieun Lee

The Bank of Korea; Bank of Korea - Economic Research Institute

Multiple version iconThere are 2 versions of this paper

Date Written: November 15, 2023

Abstract

English Abstract: Using unique tick-by-tick data from an exchange, this paper examines the relationship between the US dollar and liquidity in the Korean government (Treasury) bond market. We find that a strong US dollar deteriorates the Treasury market’s liquidity by increasing the bid-ask spread and the price impact and lowering market depth. The effects of fluctuations in the broad US dollar index on Treasury market liquidity become more pronounced when funding liquidity conditions are tighter, when banks’ total capital ratio is lower with greater foreign currency risk, or when there is a larger sell-off of Korean Treasury bonds by foreign investors. The empirical evidence supports the financial channel of exchange rates affecting Treasury market liquidity. In particular, a strong dollar as a global risk factor is likely to limit the market intermediation capacity of emerging market dealers through the currency exposures of borrowers or dealers and thus tighten market conditions.

Korean Abstract: 본고는 한국거래소의 실시간 국고채 호가장·체결장 자료를 이용하여 국고채 시장 유동성 지표를 측정하고 미 달러 지수가 국내 국고채 시장 유동성에 미치는 영향을 회귀분석하였다. 분석결과, 달러화 강세로 호가스프레드와 가격충격이 확대되고 심도(depth)가 축소되면서 국고채 시장유동성이 유의하게 감소하는 것으로 나타났다. 이는 달러화 강세로 국고채전문딜러(primary dealer)의 대차대조표가 악화되고 시장중개기능이 제약되면서 국고채 시장유동성이 저하될 수 있음을 의미한다. 추가적으로 달러화 절상이 국고채 시장 유동성에 미치는 영향은 자본조달여건 악화, 금융기관의 BIS 자기자본비율 하락, 외국인 국채 매도로 더욱 강화되는 것으로 나타났다. 이러한 달러화 지수와 한국 국고채 시장 유동성 간 실증적 관계는 환율의 금융경로(financial channel of exchange rates)가 잘 작동함에 따라, 외환시장의 안정이 국내 금융시장 안정에도 도움이 될 수 있음을 시사한다.

Keywords: dollar, exchange rate, Treasury bond liquidity, funding liquidity, foreign investors

JEL Classification: E58, F34, G12

Suggested Citation

Lee, Jieun, Dollar and Government Bond Liquidity: Evidence from Korea (November 15, 2023). Bank of Korea WP 2023-22, Available at SSRN: https://ssrn.com/abstract=4633796 or http://dx.doi.org/10.2139/ssrn.4633796

Jieun Lee (Contact Author)

The Bank of Korea ( email )

110 3-Ga Namdaemunno Jung-Gu
Seoul 100-794, 100-794
Korea Republic of (South Korea)
82-2-759-5470 (Phone)

Bank of Korea - Economic Research Institute ( email )

110 3-Ga Namdaemunno Jung-Gu
Seoul 100-794
Korea Republic of (South Korea)

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